Answer to Question #151580 in Finance for Oscar

Question

Discuss why homogenous expectations a bout probability distribution of expected returns is a critical in CAPM (6 marks)
The following details relates to three portfolios held by Uzima Fund managers.
Portfolio
Expected Return
Beta Factor
Variance

W
16.5%
1.3
16

X
13.5%
0.8
4

Y
14.5%
1.1
9

The risk free rate is 5%

Evaluate the performance of the portfolios using appropriate measures. (4mks)

Answer 1

The CAMP model is quite simple to use, many of its initial provisions are not fully or partially implemented in real markets. Homogeneous expectations of investors - such a situation is possible only if there is an absolutely effective market, which is not found in practice. The distribution of asset returns is normal or close to normal. In practice, the distribution of asset returns is close to normal in very rare cases, which also affects the choice of investors when forming portfolios.

Also, not only risk affects the return on assets, this is proven by scientists.