Problem #3 (10 marks) a) A stock had returns of 12%, 5%, 8%, 17%, and -7%...

Transcribed Image Text:

Problem #3 (10 marks) a) A stock had returns of 12%, 5%, 8%, 17%, and -7% for the past five years. What was arithmetic average annual return for this stock? (2 marks) b) Suppose the risk-free rate is 4%. What is the reward for bearing risk (average risk premium) of owning this stock? (1 mark) c) What was the standard deviation of the returns for this stock? (4 marks) d) Assuming that the returns on the stock follow a normal distribution, what is the range of possible returns, 95% of the time? (3 marks) Problem # 6 (4 Marks) Draw the SML and plot asset C such that it has less risk than the market but plots above the SML, and asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio is on your graph. ) Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium. Problem #3 (10 marks) a) A stock had returns of 12%, 5%, 8%, 17%, and -7% for the past five years. What was arithmetic average annual return for this stock? (2 marks) b) Suppose the risk-free rate is 4%. What is the reward for bearing risk (average risk premium) of owning this stock? (1 mark) c) What was the standard deviation of the returns for this stock? (4 marks) d) Assuming that the returns on the stock follow a normal distribution, what is the range of possible returns, 95% of the time? (3 marks) Problem # 6 (4 Marks) Draw the SML and plot asset C such that it has less risk than the market but plots above the SML, and asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio is on your graph. ) Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.