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Question One: (8marks) You are thinking about investing your money in the stock market. You have the following three stocks in mind: stock A, stock
Question One: (8marks) You are thinking about investing your money in the stock market. You have the following three stocks in mind: stock A, stock B and stock C. You know that the economy can either go in recession or it will boom. You also know the following about your three stocks: Common stock Coefficient of variation covariance of the return on stock, km Standard deviation ( B 50 75 40 25 15 18 6 3 2 : 5 Additionally, assume that the Standard deviation of the market istand correlation coefficient of returns between securities: A and B is(-100%) 1 A and C is 100% B and C is -50% -05 For a portfolio (A,B) consisting of 75 percent of invested in stock A and the remainder invested in stock B. For a portfolio (A,C) consisting of 25 percent of invested in stock A and the remainder invested in stock C. For a portfolio (B,C) consisting of 60 percent of invested in stock B and the remainder invested in stock C. Consequently Determine the: a. Expected rate of return on the portfolio (AC). b. Beta of the portfolio (AC). c. Standard deviation of the portfolio (AC). d. Suppose the risk-free rate is 4 percent and the market risk premium is 6 percent Would you recommend investment C? Why or why not? -,25 -,75
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