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7. Use the following information to answer the questions below. Security A B Return 15% 12% Standard Deviation 8% 14% Beta 1.2 0.9 (10
7. Use the following information to answer the questions below. Security A B Return 15% 12% Standard Deviation 8% 14% Beta 1.2 0.9 (10 marks) a. Which of A and B has the least total risk? The least systematic risk? b. What is the value of systematic risk for a portfolio with 75% of the funds invested in A and 25% of the funds invested in B? C. Calculate the risk free rate of return and the market risk premium (i.e., RE and RM - Rf). d. What is the portfolio expected return and the portfolio beta if you invest 30% in A, 30% in B, and 40% in the risk-free asset? (For questions (d) and (e), assume the risk free rate of return is 5%.) e. What is the portfolio expected return with 125% invested in A and the remainder in the risk-free asset via borrowing at the risk-free interest rate? f. What is the beta of the portfolio created in part (e)?
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