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Explore the implications of short-selling and the inclusion of a risk-free asset.
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- Define risk-free asset?The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other risk variable not relevant?. The Capital asset Pricing Model (CAPM) contends that there is systematic & unsystematic risk for an individual security. Which is the relevant risk variable & why it’s relevant?
- How does the efficient frontier change if we add the risk free asset into theportfolio of risky assets? Explain both the cases when borrowing at the riskfree is allowed and when it is not. Support your explanations with a graph.When adding a risky asset to a portfolio of may risky assets, which property of the asset has a greater influence on risk: its standard deviation or its covariance with other assets? ExplainExplain why risk adjustments are important and how they can affect firm value.