Consider an economy with 2 risky stocks a and b plus a risk free assets. Assume that
Question:
Consider an economy with 2 risky stocks a and b plus a risk free assets. Assume that CAPM holds. The correlation between 2 stocks is 0.30. Stock a share price is 100, shares outstanding 1000, expected return 0.250, and standard deviation is 0.
Stock a share price is 100, shares outstanding 1000, expected return 0.250, and standard deviation is 0.30. Stock b share price is 40, shares outstanding 2500, expected return 0.345, and standard deviation is 0.40.
1. Determine the market portfolio weights for stock a and b.
2. Compute expected return and standard deviation.
3. Determine capm beta of each stock.
4. What’s is the risk free rate in this economy.
5. A naïve investor wants to construct a portfolio of the risk free assets and stock b that has the same standard deviation as the market portfolio. What is the expected return between this new portfolio and the market portfolio explain?
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1285190907
8th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw