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3. You have been given the expected return data shown in the first table on three assetsF, G, and Hover the period 2017-2020 Year Asset
3. You have been given the expected return data shown in the first table on three assetsF, G, and Hover the period 2017-2020
Year | Asset F | Asset G | Asset H |
2017 | 11 | 12 | 15 |
2018 | 8 | 9 | 18 |
2019 | 5 | 21 | 21 |
2020 | 14 | 6 | 12 |
Using these assets, you have isolated the three investment alternatives shown in the following table.
Alternative | Investment |
1 | 100% of asset F |
2 | 75% of asset F and 25% of asset G |
3 | 50% of asset F and 50% of asset H |
- Calculate the expected return over the 4-year period for each of the three alternative
- Calculate the standard deviation of returns over the 4-year period for each of the three alternatives.
- Use your findings in parts a and b to calculate the coefficient of variation for each of the three alternatives.
- On the basis of your findings, which of the three investment alternatives do you recommend? Why?
- A stock has a beta of 0.75, the markets expected rate of return is 12%, and the risk-free rate is 3 percent.
- What must the expected return on this stock be?
- Draw the Security Market Line (SML) -be sure to label all relevant points.
- Suppose the risk free rate falls to 2%. What is the expected return on this stock? Redraw the SML. How has the shape of the curve changed?
- Suppose the markets expected return is 15 percent and the risk free rate is 3%. What is the expected return on his stock? Redraw the SML. How has the shape changed from the first graph you created?
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