Question
The Market Index (M) has a risk premium of 5.5% and a volatility (M) of 0.36. The risk-free rate (Rf) is 4%. A stock (S)
The Market Index (M) has a risk premium of 5.5% and a volatility (M) of 0.36. The risk-free rate (Rf) is 4%. A stock (S) has volatility (S) of 0.90 and its returns are correlated with Ms returns with SM=0.5. o What is the covariance of S and Ms returns? o What are the betas of each asset above? o What is E[RM]? What is E[RS]? o What portfolio of M and the risk-free asset would give the same expected return as S? What would be the volatility of this portfolio? o If Grandpa invests $500 in the risk free asset and $1500 in M, what is his portfolios beta? o If Grandma borrows $1000 and combines that with $2000 of her own money to invest $3000 in M, what is her portfolios beta?
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