Assume that the CAPM holds, and refer to the graph below. What is the correlation between stocks B and C?Expected Return [E(1)]35%30%25%20%CML (CapitalMarket Line)CMVE15%B10%5%0%0%10%20%○ a. The correlation is 0.375○ b. The correlation is zeroc. The correlation is 0.573○ d. The correlation is 0.75330%40%50%60%Standard Deviation [SD(r)]

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Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 1P: The standard deviation of stock returns for Stock A is 40%. The standard deviation of the market...

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Question

Assume that the CAPM holds, and refer to the graph below. What is the correlation between stocks B and C?
Expected Return [E(1)]
35%
30%
25%
20%
CML (Capital
Market Line)
C
MVE
15%
B
10%
5%
0%
0%
10%
20%
○ a. The correlation is 0.375
○ b. The correlation is zero
c. The correlation is 0.573
○ d. The correlation is 0.753
30%
40%
50%
60%
Standard Deviation [SD(r)]

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Assume that the CAPM holds, and refer to the graph below. What is the correlation between stocks B and C? Expected Return [E())] 35% 30% 25% CML (Capital Market Line) 20% C MVE 15% 10% 5% 0% 0% 10% 20% a. The correlation is 0.375 ○ b. The correlation is zero c. The correlation is 0.573 O d. The correlation is 0.753 30% A B 40% 50% 60% Standard Deviation [SD(r)]
Suppose that three stocks (A, B, and C} and two common risk factors (1 and 2) have the following relationship: E(RA) = (1.1)A1 + (0.8)A2 E(RB) = (0.7)A1 + (0.6)A2 E(RC) = (0.3)A1 + (0.4)A2 a. If A1 = 4 percent and A2 = 2 percent, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for $30 and will not pay a dividend in the next year. b. Suppose that you know that next year the prices for Stocks A, B, and C will actually be $31.50, $35.00, and $30.50. Create and demonstrate a riskless, arbitrage investment to take advantage of these mispriced securities. What is the profit from your investment? You may assume that you can use the proceeds from any necessary short sale. Problems 13 and 14 refer to the data contained in Exhibit 7.23, which lists 30 monthly excess returns to two different actively managed stock portfolios (A and B) and three different common risk factors (1, 2, and 3). {Note: You may find it…
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4
Suppose that the index model for stocks A and B is estimated from excess returns with the following results:RA = 3% + .7RM + eARB = −2% + 1.2RM + eBσM = 20%; R-squareA = .20; R-squareB = .12What are the covariance and the correlation coefficient between the two stocks?
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Suppose stock A's return is related to the market return by: RetA=0.6*Market Return + 0.04* (Market Return)² What is the change in stock A given a change in the market return? Suppose stock B's return is related to the market return by: RetB=0.6*Market Return What is the difference in returns between A and B if the market return is 5%? What is the difference if the market return is -5%?
The index model has been estimated using historical excess return data for stocks A, B, and C, with the following results: RA = 0.02 + 0.9RM + eA RB = 0.04 + 1.2RM + eB RC = 0.10 + 1.ORM + eC OM oM = 0.22 o(eA) = 0.21 o(eB ) = 0.11 o(eC ) = 0.23 a. What are the standard deviations of stocks A, B, and C? b. Break down the variances of stocks A, B, and C into their systematic and firm-specific components. c. What is the covariance between the returns on each pair of stocks? d. What is the covariance between each stock and the market index?
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