Consider the following information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectly correlated. The risk-free rate is 5.00%.

Stock	Expected Return	Standard Deviation	Beta
A	12.50%	10%	1.5
B	14.00%	10%	1.8
C	17.00%	10%	2.4

Let ri be the expected return of stock ii, rRF represents the risk-free rate, bb represents the Beta of a stock, and rM represents the market return.

Using the SML equation, you can solve for the market risk premium which, in this case, equals approximately __________. .

Consider Fund P, which has one-third of its funds invested in each of stocks A, B, and C.

The beta for Fund P is approximate ________ .

You have the market risk premium, the beta for Fund P, and the risk-free rate.

Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock.

This information implies that the required rate of return for Fund P is approximately _______ .

Which of the following is the reason why the standard deviation for Fund P is less than 10%?

Any two stocks in Fund P have a correlation coefficient of 1.

The stocks in Fund P each have differing standard deviations.

The stocks in Fund P are perfectly correlated.

The stocks in Fund P are not perfectly correlated.

Answer rating: 100% (QA)

Part A Calculating market risk premium using SML The market risk premium for any security can be def... View the full answer