Given the following probability distributions for Security A and the market portfolio, M: State Probability of Occurrence
Question:
Given the following probability distributions for Security A and the market portfolio, M:
StateProbability of OccurrenceReturn on Security AReturn on Market, M
Bust0.212%2%
Boom0.88%16%
Given that the expected rate of return and the standard deviation of the market portfolio, M, are, respectively, 0.1320 and 0.056, and the inflation rate and risk-free rate are, respectively, 3% and 4%.All rates are expressed in nominal terms.
(a)Calculate the beta, expected return, and standard deviation of Security A.
Hint: You need to calculate the covariance between Security A and the Market!
Based on your answers for part (a),
(b)Calculate the required (CAPM) rate of return on Security A, and explain your investment recommendation on Security A according to the CAPM Analysis, and
(c)assume that you invest $450,000 in Security A and $150,000 in the market portfolio M, calculate the beta, variance, and expected real return of the 2-asset portfolio composing of A and M.
please show all work and round to 4 decimal points. Thanks.