Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Problem 2 (12.5pts) You have $10,000,000 and you are considering investing in three stocks: A, B and C. The expected return and standard deviation of
Problem 2 (12.5pts) You have $10,000,000 and you are considering investing in three stocks: A, B and C. The expected return and standard deviation of the market are equal to 8% and 16% respectively. The risk-free rate is equal to 1%. Dave, your friend, has arrived to some expected return figures for these stocks. A B Beta 0.8 0.5 1.35 Standard Deviation 14% 20% 30% Dave Forecasted Return 10% 8% 12% a. Is Dave correct about his conclusion on forecasted returns? Please explain why and indicate by how much Dave's forecasted returns differ from what should be the risk-adjusted expected returns available in the market for each of the stocks A, B, and C respectively? (6pts) b. If you decided to invest $5,000,000 equally across the three stocks. 1. What is the beta of your portfolio? (2.5pts) 2. What is the expected return on your portfolio? (2.5pts) c. What type of risk we care about and how it is measured? (1.5pts)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started