The Treasury-Bill rate in the following economy is 3%. On the basis of the Capital Asset...

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The Treasury-Bill rate in the following economy is 3%. On the basis of the Capital Asset Pricing Model and given the following data: State 1 2 3 4 Probability 0.10 0.20 0.30 0.40 Market Returns -0.23 -0.12 0.14 0.17 Stock X returns -0.40 -0.28 0.22 0.32 Stock Y returns -0.34 -0.16 0 0.40 i) Calculate the risk premium in the market? ii) What is the beta of each individual stock (X and Y) if the correlation between Market Returns and Stock X is 0.994 and the correlation between Market Returns and Stock Y is 0.882 ? iii) If stock X and Stock Y were to be combined into a portfolio with 30% in Stock X and 70% in stock Y, what would be the portfolio's beta and expected return based on the Capital Asset Model? The Treasury-Bill rate in the following economy is 3%. On the basis of the Capital Asset Pricing Model and given the following data: State 1 2 3 4 Probability 0.10 0.20 0.30 0.40 Market Returns -0.23 -0.12 0.14 0.17 Stock X returns -0.40 -0.28 0.22 0.32 Stock Y returns -0.34 -0.16 0 0.40 i) Calculate the risk premium in the market? ii) What is the beta of each individual stock (X and Y) if the correlation between Market Returns and Stock X is 0.994 and the correlation between Market Returns and Stock Y is 0.882 ? iii) If stock X and Stock Y were to be combined into a portfolio with 30% in Stock X and 70% in stock Y, what would be the portfolio's beta and expected return based on the Capital Asset Model?

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i To calculate the risk premium in the market we need to find the difference between the market retu... View the full answer