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(b) In a CAPM economy, the risk-free interest rate is 4%. The expected return of the market portfolio is 12% and its standard deviation is
(b) In a CAPM economy, the risk-free interest rate is 4%. The expected return of the market portfolio is 12% and its standard deviation is 20%. All numbers are quoted in annualized term. (0) If the expected return of a stock is 20%, what should be its beta and its standard deviation? Briefly explain. (ii) In order to achieve an efficient portfolio with an expected return of 6%, how should an investor allocate her money between risk-free asset and market portfolio? Empirically, it is observed that low-beta stocks tend to outperform while high-beta stocks underperform relative to the benchmark return suggested by security market line (SML). Give one possible explanation for this anomaly. (b) In a CAPM economy, the risk-free interest rate is 4%. The expected return of the market portfolio is 12% and its standard deviation is 20%. All numbers are quoted in annualized term. (0) If the expected return of a stock is 20%, what should be its beta and its standard deviation? Briefly explain. (ii) In order to achieve an efficient portfolio with an expected return of 6%, how should an investor allocate her money between risk-free asset and market portfolio? Empirically, it is observed that low-beta stocks tend to outperform while high-beta stocks underperform relative to the benchmark return suggested by security market line (SML). Give one possible explanation for this anomaly
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