2. Consider a market with only two risky stocks, A and B, and one risk-free asset....

 

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2. Consider a market with only two risky stocks, A and B, and one risk-free asset. We have the following information about the stocks. Stock A Stock B Number of shares in the market Price per share Expected rate of return Standard dev. of return $2.00 20% 600 12% 400 $2.50 OB Furthermore, the correlation coefficient between the returns of stocks A and B is PAB =.We assume that the returns are annual, and that the assumptions of CAPM hold. (a) (4 points) Find the values of g and o such that the expected rate of return and the standard deviation of the market portfolio are 17% and 13% respectively. (b) (3 points) What is the beta of each stock? (c) (3 points) What is the risk-free rate in this market? 2. Consider a market with only two risky stocks, A and B, and one risk-free asset. We have the following information about the stocks. Stock A Stock B Number of shares in the market Price per share Expected rate of return Standard dev. of return $2.00 20% 600 12% 400 $2.50 OB Furthermore, the correlation coefficient between the returns of stocks A and B is PAB =.We assume that the returns are annual, and that the assumptions of CAPM hold. (a) (4 points) Find the values of g and o such that the expected rate of return and the standard deviation of the market portfolio are 17% and 13% respectively. (b) (3 points) What is the beta of each stock? (c) (3 points) What is the risk-free rate in this market?

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a To find the values of up and on such that the expected rate of return and the standard deviation o... View the full answer