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Q2: Assume that the market portfolio has an expected return of 12% and volatility of 30%. Stock X has a 0.4 correlation with the market
Q2: Assume that the market portfolio has an expected return of 12% and volatility of 30%. Stock X has a 0.4 correlation with the market portfolio and 20% volatility (Standard deviation). The risk-free rate is 1.5%. a) What is the Stock X 's ? b) If you believe CAPM is the correct model to use for pricing the assets, what is the expected return on Stock X? c) What percentage of Stock X 's total variance risk is non-systematic (idiosyncratic)? d) Suppose you can only tolerate 20% risk on your investment, bow would you allocate your money in between market portfolio and the risk-free asset? e) Suppose you can only tolerate 20% risk on your investment, would you rather invest all your money in Stock X or follow the strategy in part d)? Please explain
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