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3. Given stock X has a beta of 2 and a residual standard deviation of 20%. The market index portfolio has a standard deviation of
3. Given stock X has a beta of 2 and a residual standard deviation of 20%. The market index portfolio has a standard deviation of 12%. Based on CAPM, X has an expected return of 10% a. Calculate the total variance of stock X.* b. You want to increase the return by selling X and use the proceeds to buy stock Y which has the same beta but a higher residual standard deviation. Can you increase the return by holding Y if CAPM is true? (No explanation required)
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