Someone who believes that the collection of all stocks satisfies a single-factor model with the market portfolio serving as the factor gives you information on three stocks which make up a portfolio. (See Table 8.3.) In addition, you know that the market portfolio has an expected rate of return of $12 %$ and a standard deviation of $18 %$. The risk-free rate is $5 %$.

(a) What is the portfolio's expected rate of return?

(b) Assuming the factor model is accurate, what is the standard deviation of this rate of return?

Transcribed Image Text:

TABLE 8.3 SIMPLE PORTFOLIO Stock Beta Standard deviation of random error term Weight in portfolio A 1.10 7.0% 20% B 0.80 2.3% 50% C 1.00 1.0% 30%