Question 7

Assume that CAPM holds. a) You believe that IBM stock will be worth $40 per share one year from now. How much are you willing to pay for one share today if the annualized risk-free rate is 8 percent, the expected rate of return on the market is 15 percent, the variance of market return is 9 percent and IBMs beta is 0.83? b) Continuing from part (a), Jon has $1000 to invest, and he borrows an additional $800 to invest. What is his portfolios expected return and standard deviation of return?

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