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Consider the following probability distribution for stocks A and B : table [ [ State of Economy,Probability of State of , Return on Security
Consider the following probability distribution for stocks A and :
tableState of Economy,Probability of State ofReturn on Security AReturn on Security B Economy BoomStrong Growth,Normal Growth,Weak Growth,Bust
i What is the expected return of an equally weighted portfolio? What is the standard deviation of an equally weighted portfolio?
ii What is the standard deviation of Security A What is the standard deviation of Security B
iii. Based on the information above, what is the correlation coefficient of the Security A to Security B
iv Assuming both securities are on the same security market line. The equal weight portfolio has a Beta Security A Beta is twice Security B Beta, what is the market risk premium?
v Assuming both securities are on the same security market line. The equal weight portfolio has a Beta Security A Beta is twice Security B Beta, what is the riskfree rate?
vi Calculate the Sharpe Ratio for Security A Security B and the equally weighted portfolio.
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