Correlation and Bet a You have been provided the following data about the securities of three firms,
Question:
Correlation and Bet a You have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset:
Security Expected Return Standard Deviation Correlation* Beta Firm A .10 .31 (i) .85 Firm B .14 (ii) .50 1.40 Firm C .16 .65 .35 (iii)
The market portfolio .12 .20 (iv) (v)
The risk-free asset .05 (vi) (vii) (viii)
*With the market portfolio.
a. Fill in the missing values in the table.
b. Is the stock of Firm A correctly priced according to the capital asset pricing model (CAPM)? What about the stock of Firm B? Firm C? If these securities are not correctly priced, what is your investment recommendation for someone with a well-diversified portfolio?
Step by Step Answer:
Corporate Finance With Connect Access Card
ISBN: 978-1259672484
10th Edition
Authors: Stephen Ross ,Randolph Westerfield ,Jeffrey Jaffe