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Problem 1 3 - 3 1 Using CAPM ( LO 1 , 4 ) There are two stocks in the market, stock A and stock
Problem Using CAPM LO There are two stocks in the market, stock A and stock B The price of stock A today is $ The price of stock A next year will be $ if the economy is in a recession, $ if the economy is normal, and $ if the economy is expanding. The probabilities of recession, normal times, and expansion are and respectively. Stock A pays no dividends and has a beta of Stock B has an expected return of a standard deviation of a beta of and a correlation with stock A of The market portfolio has a standard deviation of Assume the CAPM holds. a What are the expected return and standard deviation of stock ADo not round intermediate calculations. Round the final answers to decimal places. Stock A Expected return Standard deviation b If you are a typical, riskaverse investor with a welldiversified portfolio, which stock would you prefer? multiple choice Stock A Stock B c What are the expected return and standard deviation of a portfolio consisting of of stock A and of stock BDo not round intermediate calculations. Round the final answers to decimal places. Expected return Standard deviation d What is the beta of the portfolio in cDo not round intermediate calculations. Round the final answer to decimal places. Beta of the portfolio
Problem Using CAPM LO
There are two stocks in the market, stock A and stock B The price of stock A today is $ The price of stock A next year will be $ if the economy is in a recession, $ if the economy is normal, and $ if the economy is expanding. The probabilities of recession, normal times, and expansion are and respectively. Stock A pays no dividends and has a beta of Stock B has an expected return of a standard deviation of a beta of and a correlation with stock A of The market portfolio has a standard deviation of Assume the CAPM holds.
a What are the expected return and standard deviation of stock ADo not round intermediate calculations. Round the final answers to decimal places.
Stock A
Expected return
Standard deviation
b If you are a typical, riskaverse investor with a welldiversified portfolio, which stock would you prefer?
multiple choice
Stock A
Stock B
c What are the expected return and standard deviation of a portfolio consisting of of stock A and of stock BDo not round intermediate calculations. Round the final answers to decimal places.
Expected return
Standard deviation
d What is the beta of the portfolio in cDo not round intermediate calculations. Round the final answer to decimal places.
Beta of the portfolio
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