Let A and B be the two ONLY individual stocks in the market. Let's suppose that...
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Let A and B be the two ONLY individual stocks in the market. Let's suppose that the market portfolio M is composed of 50% of stock A and 50% of stock B. In addition, we know that the correlation coefficient between the returns of stock A and stock B is -0.5. With the information in the table below, answer the following questions (4 points) Variable Expected return E (R;), i = A or B Return Standard Deviation s₁ Stock A 10% 20% Stock B 30% 40% a) What is the expected return of the market portfolio M? (1 point) b) What is the standard-deviation of the return of the market portfolio M? (1 points) c) Is there any domination relationship between stock A (or stock B) and the market portfolio M in terms of risk and expected return? (1 point) d) For a risk-free interest-rate is 4%, write the Capital Asset Pricing Model for an asset i whose expected return is E(Ri) and whose systematic risk is beta(i) (please specify all the other parameters except these two variables E(Ri) and beta (i)). (1 point) e) Plot the CAPM equation in a coordination system of (beta(i), E(Ri)) by specifying the intercept and the slope. (1 point) Let A and B be the two ONLY individual stocks in the market. Let's suppose that the market portfolio M is composed of 50% of stock A and 50% of stock B. In addition, we know that the correlation coefficient between the returns of stock A and stock B is -0.5. With the information in the table below, answer the following questions (4 points) Variable Expected return E (R;), i = A or B Return Standard Deviation s₁ Stock A 10% 20% Stock B 30% 40% a) What is the expected return of the market portfolio M? (1 point) b) What is the standard-deviation of the return of the market portfolio M? (1 points) c) Is there any domination relationship between stock A (or stock B) and the market portfolio M in terms of risk and expected return? (1 point) d) For a risk-free interest-rate is 4%, write the Capital Asset Pricing Model for an asset i whose expected return is E(Ri) and whose systematic risk is beta(i) (please specify all the other parameters except these two variables E(Ri) and beta (i)). (1 point) e) Plot the CAPM equation in a coordination system of (beta(i), E(Ri)) by specifying the intercept and the slope. (1 point)
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Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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