Suppose that the CAPM holds. All returns mentioned in the following are over the next year....

 

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Suppose that the CAPM holds. All returns mentioned in the following are over the next year. The risk-free rate of return is 1%. The market portfolio has a Sharpe ratio of 0.25, and the standard deviation of the market portfolio's rate of return is 20%. The rate of return on stocks in the company Schulich has an expected value of 9% and a standard deviation of -40%. a. What is the beta-value of the stocks of Schulich? b. What is the correlation between the rate of return on Schulich stocks and the rate of return on the market portfolio? c. The rate of return on a portfolio of a long position in the risk-free asset and a long position in Schulich stocks has a standard deviation of 32%. What is the expected rate of return on the portfolio? d. Stocks in the company Rotman also have an expected return of 9%, but a correlation of 0.4 with the market portfolio. What is the standard deviation of the return of the stocks of Rotman? e. Explain why the market can be in equilibrium even though the stocks of Rotman and Schulich have different standard deviations but the same expected returns. f. Sketch diagrams showing the Security Market Line and the Capital Market Line. Indicate the location of the market portfolio, the stocks of Rotman, and the stocks of Schulich in both diagrams. Suppose that the CAPM holds. All returns mentioned in the following are over the next year. The risk-free rate of return is 1%. The market portfolio has a Sharpe ratio of 0.25, and the standard deviation of the market portfolio's rate of return is 20%. The rate of return on stocks in the company Schulich has an expected value of 9% and a standard deviation of -40%. a. What is the beta-value of the stocks of Schulich? b. What is the correlation between the rate of return on Schulich stocks and the rate of return on the market portfolio? c. The rate of return on a portfolio of a long position in the risk-free asset and a long position in Schulich stocks has a standard deviation of 32%. What is the expected rate of return on the portfolio? d. Stocks in the company Rotman also have an expected return of 9%, but a correlation of 0.4 with the market portfolio. What is the standard deviation of the return of the stocks of Rotman? e. Explain why the market can be in equilibrium even though the stocks of Rotman and Schulich have different standard deviations but the same expected returns. f. Sketch diagrams showing the Security Market Line and the Capital Market Line. Indicate the location of the market portfolio, the stocks of Rotman, and the stocks of Schulich in both diagrams.

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Answer Expected Return Market Portfolio M Risk Beta SML CML In the above sketch the CML is re... View the full answer