BMAN23000A Question 12 (answer all parts) a) Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio): growth stocks and value stocks. Assume that these two portfolios are equal in size (market value), the correlation of their returns is equal to 0.6, and the portfolios have the following characteristics: Value Stocks Growth Stocks Volatility Expected (standard Return Deviation) 12% 14% 15% 24% The risk free rate is 3.5%. Assume that the market portfolio is a 50-50 combination of the value and growth portfolios above. i. Calculate the Sharpe ratio for the market portfolio. ii. Briefly explain what the Sharpe ratio is. (8 marks) (2 marks) b) Suppose that Monsters Inc. has a 24% volatility (standard deviation) and a correlation with the market of .60. Assume that the risk-free rate is the same as in part a) and the market portfolio characteristics are those you calculated in part a). If CAPM assumptions hold: i. Calculate Monsters' beta with the market ii. Calculate Monsters' required return (4 marks) (4 marks) iii. Suppose that Monsters' expected return is 15%. Calculate Monsters' alpha. Briefly explain. c) Describe the CAPM assumptions. (6 marks) (6 marks) d) Describe what each of the following pairs of asset pricing models has in common, and how they differ: i. ii. CAPM and Fama-French-Carhart (F-F-C) model F-F-C and APT Page 4 of 6 (5 marks) (Total 35 marks) PTO