3. Consider three stocks A, B and C and a market index M with the following prices: Year то T1 T2 110 13 T3 125 15 75 1786 108 85 12 50 A B 14 C 60 70 1435 1578 1128 The risk-free rate equals 4%. M a. Compute the expected return and risk on each stock and the market index. b. Construct the matrix of variances and covariances between these assets. c. Construct the matrix of the correlation coefficients.
3. Consider three stocks A, B and C and a market index M with the following prices: Year то T1 T2 110 13 T3 125 15 75 1786 108 85 12 50 A B 14 C 60 70 1435 1578 1128 The risk-free rate equals 4%. M a. Compute the expected return and risk on each stock and the market index. b. Construct the matrix of variances and covariances between these assets. c. Construct the matrix of the correlation coefficients.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:3. Consider three stocks A, B and C and a market index M with the following prices:
Year
TO
T1
T2
T3
A
85
108
110
125
B
12
14
13
15
C
50
60
70
75
M
1128
1435
1578
1786
The risk-free rate equals 4%.
a. Compute the expected return and risk on each stock and the market index.
b. Construct the matrix of variances and covariances between these assets.
c. Construct the matrix of the correlation coefficients.
d. Compute the beta coefficients of these companies and the expected return at equilibrium.
e. Construct the minimum risk portfolio P1 composed of A and C. Compute the expected return
and risk on this portfolio.
f. Construct a portfolio P2 composed of A, B and C in proportions of 20%, 30% and 50%.
Compute the expected return and risk on this portfolio. What is the contribution of each security
to the return and risk pf this portfolio?
g. Construct an equally weighted portfolio P3 composed of A, B, C and the risk-free rate.
Compute the beta coefficient and position this portfolio with respect to the SML. Compute the
HPR expected by an investor who holds this portfolio.
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