Question: Consider a very simple world in which there are only two risky stocks, A and B, and a risk-free asset F. Details for stocks A

Consider a very simple world in which there are only two risky stocks, A and B, and a risk-free asset F. Details for stocks A and B are listed in the following table.

Stock Shares outstanding Price/Share Exp. return Std. dev.

A 100 $1.50 15% 15%

B 150 $2.00 12% 9%

The correlation coefficient between returns on stocks A and B is 1/3. Assuming that CAPM holds:

a) What is the expected rate of return of the market portfolio? Hint: The market portfolio has the form M= w_A*A+ w_B*B. Find portfolio weights w_A and w_B first. (1pt, Answer format: 14.20, in percent, but include no % symbol, round to 2 digits.)

What is the standard deviation of the market portfolio?

What is the beta of stock A?

What is the risk-free rate?

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