Question
4. The Krause investment fund has $1,000,000 in total assets with $600,000 in Stock A and $400,000 in Stock B. The correlation between the two
4. The Krause investment fund has $1,000,000 in total assets with $600,000 in Stock A and
$400,000 in Stock B. The correlation between the two stocks is = 0.2.
The required rate of return on the market is 12.5%, and the risk-free rate is 5%.
| Beta | Standard Deviation | Past Average Return |
Stock A | 0.6 | 40% | 11% |
Stock B | 1.2 | 20% | 13.5% |
a. Calculate the required rate of return for stock A and the required rate of return for stock B.
b. Calculate the beta of the portfolio and the required rate of return of the portfolio. (7 points)
c. Calculate the standard deviation of the portfolio. (7 points)
d. Calculate the historical average return on the portfolio. Did the portfolio under-perform or
over-perform? Explain. (7 points)
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