Consider a very simple world in which there are only two risky stocks, A and B, and
Question:
Consider a very simple world in which there are only two risky stocks, A and B, and a risk-free asset F. Details for stocks A and B are listed in the following table.
Stock Shares outstanding Price/Share Exp. return Std. dev.
A 100 $1.50 15% 15%
B 150 $2.00 12% 9%
The correlation coefficient between returns on stocks A and B is 1/3. Assuming that CAPM holds:
a) What is the expected rate of return of the market portfolio? Hint: The market portfolio has the form M= wA*A+ wB*B. Find portfolio weights wA and wB first. (1pt, Answer format: 14.20, in percent, but include no % symbol, round to 2 digits.)
b) What is the standard deviation of the market portfolio? (1pt, Answer format: 14.20, in percent, but include no % symbol, round to 2 digits.)
c) What is the beta of stock A? Hint: Note that Cov(rM, rA)= wA*Cov(rA, rA)+ wB*Cov(rB, rA). (1pt, Answer format: 1.20, round to 2 digits.)
d) What is the risk-free rate? Hint: Apply SML to stock A. (1pt, Answer format: 14.20, in percent, but include no % symbol, round to 2 digits.)
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill