Question
Consider the following three stocks: Olympic Medal Probability Stock A Stock B Stock C Gold 0.1 25% 70% 8% Silver 0.3 20% 30% 18% Bronze
Consider the following three stocks:
Olympic Medal | Probability | Stock A | Stock B | Stock C |
Gold | 0.1 | 25% | 70% | 8% |
Silver | 0.3 | 20% | 30% | 18% |
Bronze | 0.6 | 5% | -15% | 30% |
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Current Share Price |
| 4 | 1.50 | 2.00 |
Expected Return |
| ? | 7% | 24.2% |
Standard Deviation |
| 8.08% | 29.09% | ? |
- What is the expected return for Stock A?
- What is the standard deviation for Stock C?
- Which of the three stocks is a rational investor most likely to purchase?
d) What is the expected return and standard deviation of a portfolio of 30 shares of Stock A, 30 shares of Stock B and 20 shares of Stock C?
e) Using graph explain Security Market Line (SML) and discuss that how based on SML
investor can decide whether the certain stock is under-priced or overpriced.
f) Explain the problems that can undermine the accuracy of Capital Asset Pricing Model
(CAPM).
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