Now it's time for you to practice what you've leamed. Consider the foliowing information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectiy correlated. The risk-free rate is 4.50%. Let r, be the expected return of stock i,r, represent the risk-free rate, b represent the Beta of a stock, and r r represent the market return. Using SML. equation, you can solve for the market risk premium which, in this case, equals approximately Consider fund P, which has one third of its funds invested in each of stock A,B, and C. Let ri be the expected return of stock i,rRI represent the risk-free rate, b represent the Beta of a stock, and rM represent the market retur Using SML equation, you can solve for the market risk premium which, in this case, equals approximately Consider Fund P, which has one third of its funds invested in each of stock A,B, and C. The beta for Fund P is approximately You have the market risk premium, the beta for fund P, and the risk-free rate. Hint: Recall that because the market is in equilibnum, the required rate of return is equal to the expected rate of return for each stock. This information implies that the required rate of return for Fund P is approximately Which of the following is the reason why the standard deviation for Fund P is less than 20% ? The stocks in Fund P are perfectly correlated. Any two stocks in Fund P have a correlation coefficient of 1 The stocks in Fund P each have differing standard deviations. The stocks in Fund P are not perfectly correlated