Question
You have been provided with the following data on the securities of two firms (firm D and firm G), the market portfolio and the risk-free
You have been provided with the following data on the securities of two firms (firm D and firm G), the market portfolio and the risk-free asset:
Security | ri | i | iM | i |
D | 0.18 | X1 | 0.25 | 0.80 |
G | X2 | 0.29 | 0.40 | X4 |
Market | 0.14 | 0.12 | X3 | 1.00 |
Risk-free asset | 0.03 | X6 | 0.00 | X5 |
where ri is the average realized return of asset i in the recent past (equal to its expected return today), i is the standard deviation of asset i's returns, iM is the correlation of asset i's returns with the market returns and i is the beta of asset i. Assume the CAPM holds true.
Provide an evaluation of the investment performance for stock D and make a justified investment recommendation.
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