Question
Assume that the Capital Asset Pricing Model holds. The market portfolio has annual expected return of 10% and variance of 0.09. The risk-free return is
Assume that the Capital Asset Pricing Model holds. The market portfolio has annual expected return of 10% and variance of 0.09. The risk-free return is 4%. Stock A has a beta of 0.8 and a variance of 12%. Stock B has a beta of 1.2 and a variance of 14%. The correlation between Stock A and Stock B is 40%.
a.Consider a portfolio consisting of 25% in the risk-free asset, 25% in Stock A and 50% in Stock B. Find the mean and variance of this portfolio.
b.Consider an investor with mean-variance preferences who chooses to hold a portfolio with expected return of 7%. What portfolio will he hold?
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Foundations of Financial Management
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
10th Canadian edition
1259261018, 1259261015, 978-1259024979
