Suppose the Capital Asset Pricing Model (CAPM) holds. The market premium is 8% and the standard deviation of the market portfolio is 20%. Stock A has a beta of 2 and Stock B has a beta of 1. The risk free rate is 2%. 

(a) Calculate the expected returns of Stock A and Stock B. 

(b) Do we have enough information to calculate the correlation between Stock A and Stock B? Briefly explain. 

(c) Do we have enough information to calculate the correlation between A and B, if they are well-diversified portfolios (i.e., diversifiable risk is negligible) instead of stocks? Briefly explain.

Answer rating: 100% (QA)

Part A As per CAPM Expected Return Risk free Rate Beta x Market ... View the full answer