Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index.

Question:

Figure 12.11 shows plots of monthly rates of return on three stocks versus the stock market index. (The plots are similar to those in Figure 12.2 but are taken from an earlier period.) The beta and standard deviation of each stock is given beside its plot.

In figure 12.11

(a)

Figure 12.11 shows plots of monthly rates of return on

(b)

(c)

In figure 12.12

a. Which stock is safest for a diversified investor?
b. Which stock is safest for an undiversified investor who puts all her funds in one of these stocks?
c. Consider a portfolio with equal investments in each stock. What would this portfolio's beta have been?
d. Consider a well-diversified portfolio made up of stocks with the same beta as Ford. What are the beta and standard deviation of this portfolio's return? The standard deviation of the market portfolio's return is 20%.
e. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%.

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