3. (20 points) Suppose that there are only two stocks, X and Y, listed in a...

  

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3. (20 points) Suppose that there are only two stocks, X and Y, listed in a market. There are 200 outstanding shares of stock X and 600 outstanding shares of stock Y. Current prices per share are px = 40$ and py = 20$. (i) What is the market portfolio in this market? Suppose that the expected returns on stocks X and Y are x Standard deviation of returns are X the returns is zero, that is xy = 0. ====== 15% and oy = = 10% and y 20%. = 30%. Covariance between (ii) What are the expected return and the standard deviation of return on the market portfolio? (iii) Calculate market betas, x and By, for stocks X and Y. Suppose that the risk-free rate of return is ro = 8%. (iv) Verify that the Security Market Line (approximately) holds for both stocks. 3. (20 points) Suppose that there are only two stocks, X and Y, listed in a market. There are 200 outstanding shares of stock X and 600 outstanding shares of stock Y. Current prices per share are px = 40$ and py = 20$. (i) What is the market portfolio in this market? Suppose that the expected returns on stocks X and Y are x Standard deviation of returns are X the returns is zero, that is xy = 0. ====== 15% and oy = = 10% and y 20%. = 30%. Covariance between (ii) What are the expected return and the standard deviation of return on the market portfolio? (iii) Calculate market betas, x and By, for stocks X and Y. Suppose that the risk-free rate of return is ro = 8%. (iv) Verify that the Security Market Line (approximately) holds for both stocks.