Question
Suppose a market expected return of 10% and a riskless rate of 6%. Assume the CAPM. a) A stock has correlation of 0.8 with the
Suppose a market expected return of 10% and a riskless rate of 6%. Assume the CAPM.
a) A stock has correlation of 0.8 with the stock market, standard deviation of 30%, and the market standard deviation is 20%. Compute the stock's expected return.
b) Assume both borrowing and lending are possible at the riskless rate. Show how an investor can achieve a portfolio with 1.0 beta by
i. only taking positions in a riskless security and a portfolio with beta 0.8;
ii. only taking positions in a riskless security and a portfolio with beta 1.5.
c) A stock has an expected return of 4%. Compute the beta of the security and argue for or against holding a position in the security.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started