Consider the following information for three stocks, 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.)StockExpected ReturnStandard DeviationBetaA8.30%15%0.7B10.30 15 1.2C11.50 15 1.5Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet What is the market risk premium (rM - rRF)? Round your answer to two decimal places.fill in the blank 2%What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.fill in the blank 3What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.fill in the blank 4%Would you expect the standard deviation of Fund P to be less than 15%, equal to 15%, or greater than 15%? less than 15%greater than 15%equal to 15% **CAPM, Portfolio Risk, and Return Analysis**This spreadsheet provides an analysis of expected return, standard deviation, and beta for different stocks using the Capital Asset Pricing Model (CAPM). Let's break down each section:### Key Components:1. **Risk-Free Rate (\(r_{RF}\))**: - Given as 5.50%.2. **Stock Analysis**: - **Stock A**: - Expected Return: 8.30% - Standard Deviation: 15.00% - Beta: 0.70 - **Stock B**: - Expected Return: 10.30% - Standard Deviation: 15.00% - Beta: 1.20 - **Stock C**: - Expected Return: 11.50% - Standard Deviation: 15.00% - Beta: 1.503. **Portfolio Parameters**: - **Market Risk Premium (RPM)**: - Value is not available (#N/A). - **% Stock in Fund P**: - Each stock (A, B, C) is equally weighted at 0.333333. - **Beta of Fund P**: - Data is not available (#N/A). - **Required Return of Fund P**: - Data is not available (#N/A). - **Expected Return of Fund P**: - Data is not available (#N/A).### Observations:- The spreadsheet suggests the calculation of key portfolio metrics (like the Market Risk Premium, Required Return, and Expected Return of Fund P), but these are currently marked as not available (#N/A). - Each stock is given an equal allocation in Fund P, indicating a diversified approach with equal risk weights.### Note:This data is set up for further analysis using CAPM formulas, but actual calculations for the missing metrics would require additional information or further detailed inputs into the spreadsheet.

The Capital Asset Pricing Model (CAPM) is a financial model that establishes a linear relationship between the expected return on an investment and its systematic risk. It is widely used in finance for estimating the expected return on investment and for determining the appropriate required rate of return for an asset, given its risk.The market risk Premium is 4%.The average beta of Fund P is 1.13.The required rate of return is 10.03%.If the correlation coefficient of a portfolio is 1, it means that unsystematic risk cannot be diversified. In this case, the standard deviation of fund P is 15%. If the correlation coefficient of a portfolio falls within the range of 0 to 1, some level of diversification for unsystematic risk is possible. Consequently, the standard deviation of fund P should be less than 15%.

Consider the following information for three stocks, 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 8.30 % 15 % 0.7 B 10.30 15 1.2 C 11.50 15 1.5 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet What is the market risk premium (rM - rRF)? Round your answer to two decimal places. fill in the blank 2% What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. fill in the blank 3 What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. fill in the blank 4% Would you expect the standard deviation of Fund P to be less than 15%, equal to 15%, or greater than 15%? less than 15% greater than 15% equal to 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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Question

Consider the following information for three stocks, 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	8.30	%	15	%	0.7
B	10.30		15		1.2
C	11.50		15		1.5

Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

What is the market risk premium (r_M - r_RF)? Round your answer to two decimal places.

fill in the blank 2%
What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

fill in the blank 3
What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

fill in the blank 4%
Would you expect the standard deviation of Fund P to be less than 15%, equal to 15%, or greater than 15%?
1. less than 15%
2. greater than 15%
3. equal to 15%

**CAPM, Portfolio Risk, and Return Analysis**

This spreadsheet provides an analysis of expected return, standard deviation, and beta for different stocks using the Capital Asset Pricing Model (CAPM). Let's break down each section:

### Key Components:

1. **Risk-Free Rate (\(r_{RF}\))**:
- Given as 5.50%.

2. **Stock Analysis**:
- **Stock A**:
- Expected Return: 8.30%
- Standard Deviation: 15.00%
- Beta: 0.70
- **Stock B**:
- Expected Return: 10.30%
- Standard Deviation: 15.00%
- Beta: 1.20
- **Stock C**:
- Expected Return: 11.50%
- Standard Deviation: 15.00%
- Beta: 1.50

3. **Portfolio Parameters**:
- **Market Risk Premium (RPM)**:
- Value is not available (#N/A).
- **% Stock in Fund P**:
- Each stock (A, B, C) is equally weighted at 0.333333.
- **Beta of Fund P**:
- Data is not available (#N/A).
- **Required Return of Fund P**:
- Data is not available (#N/A).
- **Expected Return of Fund P**:
- Data is not available (#N/A).

### Observations:

- The spreadsheet suggests the calculation of key portfolio metrics (like the Market Risk Premium, Required Return, and Expected Return of Fund P), but these are currently marked as not available (#N/A).

- Each stock is given an equal allocation in Fund P, indicating a diversified approach with equal risk weights.

### Note:

This data is set up for further analysis using CAPM formulas, but actual calculations for the missing metrics would require additional information or further detailed inputs into the spreadsheet.

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