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.) Expected Return Standard Deviation Beta 0.9 1.1 1.7 10.55% 11.45 с 14.15 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (TM-TRF)? Round your answer to one decimal place. % 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 t two decimal places. % d. What would you expect the standard deviation of Fund P to be? I. Less than 15% II. Greater than 15% III. Equal to 15% Stock A B -Select- 15% 15 15
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.) Expected Return Standard Deviation Beta 0.9 1.1 1.7 10.55% 11.45 с 14.15 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (TM-TRF)? Round your answer to one decimal place. % 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 t two decimal places. % d. What would you expect the standard deviation of Fund P to be? I. Less than 15% II. Greater than 15% III. Equal to 15% Stock A B -Select- 15% 15 15
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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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: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.)
Expected Return Standard Deviation Beta
10.55%
15%
0.9
11.45
15
1.1
с
14.15
15
1.7
Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6.5%, and the market is in equilibrium. (That is, required returns equal expected returns.)
a. What is the market risk premium (rM - TRF)? Round your answer to one decimal place.
%
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. What would you expect the standard deviation of Fund P to be?
I. Less than 15%
II. Greater than 15%
III. Equal to 15%
-Select-
Stock
A
B
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