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Suppose that you find the following covariance estimates for the market and two stocks based on your research. Assume that risk-free rate is 1% and
Suppose that you find the following covariance estimates for the market and two stocks based on your research. Assume that risk-free rate is 1% and market expected rate of return is 8%. If CAPM is valid, what are the expected rates of return of stock A and stock B? What percent of the total risk is systematic in stock A?
Covariance matrix:
Stock A | Stock B | Market | |
Stock A | 0.0625 | ||
Stock B | 0.0274 | 0.0234 | |
Market | 0.0384 | 0.0205 | 0.0256 |
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