Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Short Question ( SQ 3 ) ( 1 5 % ) Consider an economy with only two risky stocks Value and Growth and one risk

Short Question (SQ3)
(15%)
Consider an economy with only two risky stocks Value and Growth and one risk-free asset, Tbill. CAPM holds in this economy, and the market portfolio in this economy consists of Value and Growth. You observe an investor's optimal portfolio, denoted as portfolio Q, as below. Some statistics of the returns of the three assets and weights in portfolio Q are also reported in the table below. All the returns are efficient under CAPM. Firm-specific surprises are uncorrelated.
\table[[Assets,\table[[Weights in],[Portfolio]],\table[[Expected],[Return]],\table[[Standard],[deviation]],Correlation],[Q,,Growth,Value,T-Bill],[Growth,0.35,,0.20,1.00,0.30,-],[Value,0.35,,0.10,,1.00,-],[T-Bill,0.30,0.03,0,,,-]]
Based on the information in the table, please answer the following questions:
(A) What is the standard deviation of the market portfolio in this economy? (3%)
(B) What is the standard deviation of the return on portfolio Q(2%)
(C) If some investor wants only one half of the standard deviation of Q, what are the weights he/she should allocate to the three assets? (5%)
Growth:
Value:
T-bill:
(D) If the expected return on portfolio Q is equal to 0.058, what are the expected returns on Growth and Value stocks? (5%)
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Healthcare Finance An Introduction To Accounting And Financial Management

Authors: Louis Gapenski

1st Edition

1567930905, 978-1567930900

More Books

Students also viewed these Finance questions