Suppose the expected return on the market is 14%, market volatility is 27%, and the risk-free rate
Question:
Suppose the expected return on the market is 14%, market volatility is 27%, and the risk-free rate is 2%.
a. Suppose stock A has a beta of 1.25. According to the CAPM, what is its expected return?
b. Stock B has a volatility of 47% and a correlation with the market portfolio of 0.3. According to the CAPM, what is its expected return? How do you interpret this?
c. Stock C has a volatility of 76% and a correlation with the market portfolio of -0.2. According to the CAPM, what is its expected return? How do you interpret this?
d. What is the expected return on an equally-weighted portfolio of those three stocks?
e. What is the beta of an equally weighted portfolio of these three stocks?
f. How can you use your answer to question e. to answer question d.?
Principles of Corporate Finance
ISBN: 978-0077404895
10th Edition
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen