Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta 8.80% 16% 0.8 10.70 16 1.2 C 12.60 16 1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected r a. What is the market risk premium (M - TRF)? Round your answer to two decimal places. % b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. d. Would you expect the standard deviation of Fund P to be less than 16%, equal to 16%, or greater than 16%? I. Less than 16%
Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta 8.80% 16% 0.8 10.70 16 1.2 C 12.60 16 1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected r a. What is the market risk premium (M - TRF)? Round your answer to two decimal places. % b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. d. Would you expect the standard deviation of Fund P to be less than 16%, equal to 16%, or greater than 16%? I. Less than 16%
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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ANSWER EACH PART PLEASE!
![Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)
| Stock | Expected Return | Standard Deviation | Beta |
|-------|-----------------|--------------------|------|
| A | 8.80% | 16% | 0.8 |
| B | 10.70% | 16 | 1.2 |
| C | 12.60% | 16 | 1.6 |
Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)
a. What is the market risk premium \((r_M - r_{RF})\)? Round your answer to two decimal places.
[Input Box] %
b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
[Input Box]
c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
[Input Box] %
d. Would you expect the standard deviation of Fund P to be less than 16%, equal to 16%, or greater than 16%?
- I. Less than 16%
- II. Greater than 16%
- III. Equal to 16%
[Select Box]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F552bce27-2e42-4405-9478-45c26e7ea34f%2F196f1fc9-ed05-48b3-9046-b28d4428c007%2Fdzrrxti_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)
| Stock | Expected Return | Standard Deviation | Beta |
|-------|-----------------|--------------------|------|
| A | 8.80% | 16% | 0.8 |
| B | 10.70% | 16 | 1.2 |
| C | 12.60% | 16 | 1.6 |
Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)
a. What is the market risk premium \((r_M - r_{RF})\)? Round your answer to two decimal places.
[Input Box] %
b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
[Input Box]
c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
[Input Box] %
d. Would you expect the standard deviation of Fund P to be less than 16%, equal to 16%, or greater than 16%?
- I. Less than 16%
- II. Greater than 16%
- III. Equal to 16%
[Select Box]
Expert Solution
Step 1 What is market risk premium?
The market risk premium is the return over risk-free return received by the investor for bearing an extra level of risk in the market.
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