Question
The current market price of the Pfizer stock is $40 and its expected return is 12%, the riskless rate of interest is 1%, the expected
The current market price of the Pfizer stock is $40 and its expected return is 12%, the riskless rate of interest is 1%, the expected return on the market portfolio is 10%, and the standard deviation of the return on the market portfolio is 15%.
- What is the beta of the security?
- What is the covariance of returns on this security with the returns on the market portfolio?
- What is the correlation coefficient between returns on Pfizer and the returns on the market portfolio, if the standard deviation of returns on Pfizer is 20%.
- What will be the Pfizer's stock price, if the correlation coefficient between of its rate of return with the market portfolio doubles? Assume that Pfizer pays constant dividends.
- How does this correlation coefficient relate to the systematic risk of Pfizer?
- How is your result consistent with our understanding that assets with higher systematic risks must pay higher returns on average?
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Authors: Greg Middleton
1st Edition
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