Problem 4: CAPM (8pts)

The stock Cartman Inc. has an expected return of 10% and volatility of 15% in a country where the risk-free rate is 1% and the expected return of the market portfolio is 6%. The variance of the market portfolio is 50 (%²). You assume that the expected return of this security is in line with the CAPM.

1. Determine the securitys Beta (2pts)

2. Determine the securitys correlation with the return of the market portfolio (2pts)

3. You have two additional stocks: Kenny Ltd. and Stan Inc., with a Beta of 0.6 and 1.5, respectively. What is the Beta and the expected return of an equally weighted portfolio investing in the three stocks (i.e., Cartman Inc., Kenny Ltd., and Stan Inc.)? (2.5pts)

4. Which of the three stocks would you define as a defensive stock? Why? (1.5pt)