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2. Consider the information in Table 1 Table 1 Correlation with market portfolio 0.20 0.80 1.00 0.00 Standard deviation Return Beta Stock 1 Stock 2
2. Consider the information in Table 1 Table 1 Correlation with market portfolio 0.20 0.80 1.00 0.00 Standard deviation Return Beta Stock 1 Stock 2 Market portfolio 6% 12% 8% 0% 16% 2% Risk-free asset 0 (a) Consider Table 1. Calculate betas for stock 1 and stock 2. (b) Consider Table I. Compute the equilibrium expected return according to the CAPM for stocks 1 and 2. (c) Consider Table 1 and the equilibrium expected returns computed in part (b) of this question. Suppose the correlation between the returns on stocks 1 and 2 is 0.16. Compute the expected return and standard deviation of return of an equally-weighted portfolio of stocks 1 and 2. (d) Consider Table 1. Graphically illustrate various combinations of portfolio risk and return that can be generated by investing in stocks 1 and 2. Consider Table 1 . Suppose that a risk-free asset is available and offers a certain return of 2%. Solve for the composition, the expected return and standard deviation of the tangency portfolio. Sketch the set of portfolios consisting of the risk-free asset and the tangency portfolio. (e)
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