Can you tell from the data below which stock's return has the highest correlation with the return of the market portfolio? CLUE: Involves how beta is calculated and Covariance.
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.
ANSWER QUESTION 5 ONLY.
#5: Can you tell from the data below which stock's return has the highest correlation with the return of the market portfolio? CLUE: Involves how beta is calculated and Covariance.
#1 answer: Expected
#2 answer: Expected Return for the market portfolio = 10%
#3 answer: Expected Return of Stock E = 0.1400 Expected Return of Stock F=0.1888 Expected Return of Stock G=0.220
#4 Answer: EXpected Return of Stock H = 22.8%
![Stock
Beta
E(rj)
0.2
A
0.036
B
0.3
0.044
C
0.8
0.084
D.
1.3
0.124
1.5
F
2.1
G.
2.5
Answer the following questions with hints provided.
1. Find the expected return for the risk free asset.
Hint: Do this in two steps.
a) Use the difference of any pair of assets to infer the market risk premium [E(Rm - Rf)]1.
b) Use CAPM and the market risk premium derived in a) to back out the Rf
2. Find the expected return for the market portfolio.
3. Find the expected return for Stock E, F, and G.
4. Asset H has beta of 2.6 and an expected return of 22.5%. Is it correctly priced based on CAPM? Yes or no. Explain.
5. Can you tell from the data above which stock's return has the highest correlation with the return of the market porfolio?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe7d68a3d-74a1-43bb-a00e-227943ec7639%2F33dbe393-802b-4b62-9cbe-d6d2f1bf84d5%2Fcbvsk5e_processed.png&w=3840&q=75)
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