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13 slope of the SML does not remain constant. How would these changes affect r;? CAPM, PORTFOLIO RISK, AND RETURN Consider the following information
13 slope of the SML does not remain constant. How would these changes affect r;? CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for three stocks, Stocks X, Y, and Z. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock X Y Z Expected Return 9.00% 10.75 12.50 Standard Deviation 15% 15 15 Beta 0.8 1.2 1.6 Fund Q has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (IM - IRF)? b. What is the beta of Fund Q? C. What is the expected return of Fund Q? d. Would you expect the standard deviation of Fund Q to be less than 15%, equal to 15%, or greater than 15%? Explain.
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