Question
Suppose the expected return on the market is 14%, market volatility is 27%, and the risk-free rate is 2%. a. Suppose stock A has
Suppose the expected return on the market is 14%, market volatility is 27%, and the risk-free rate is 2%.
a. Suppose stock A has a beta of 1.25. According to the CAPM, what is its expected return?
b. Stock B has a volatility of 47% and a correlation with the market portfolio of 0.3. According to the CAPM, what is its expected return? How do you interpret this?
c. Stock C has a volatility of 76% and a correlation with the market portfolio of -0.2. According to the CAPM, what is its expected return? How do you interpret this?
d. What is the expected return on an equally-weighted portfolio of those three stocks?
e. What is the beta of an equally weighted portfolio of these three stocks?
f. How can you use your answer to question e. to answer question d.?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Capital Asset Pricing Model CAPM Analysis We can use the CAPM formula to answer these questions Heres a breakdown CAPM Formula Expected Return ER RiskFree Rate Rf Beta Market Risk Premium Rm Rf Where ...
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Principles of Corporate Finance
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen
10th Edition
9780073530734, 77404890, 73530735, 978-0077404895
