Correlation and Beta You have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset: Security Expected Return Standard Deviation Correlation* Beta Firm A .10 .31 (i) .85 Firm B .14 (i) .50 1.40 Firm C .16 (ii) .65 .35 The market portfolio .12 .20 (iv) The risk-free asset .05 (vi) (vii) (vii) *With the market portfolio. a. Fill in the missing values in the table. b. Is the stock of Firm A correctly priced according to the capital asset pricing model (CAPM)? What about the stock of Firm B? Firm C? If these securities are not correctly priced, what is your investment recommendation for someone with a well-diversified portfolio?
Correlation and Beta You have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset: Security Expected Return Standard Deviation Correlation* Beta Firm A .10 .31 (i) .85 Firm B .14 (i) .50 1.40 Firm C .16 (ii) .65 .35 The market portfolio .12 .20 (iv) The risk-free asset .05 (vi) (vii) (vii) *With the market portfolio. a. Fill in the missing values in the table. b. Is the stock of Firm A correctly priced according to the capital asset pricing model (CAPM)? What about the stock of Firm B? Firm C? If these securities are not correctly priced, what is your investment recommendation for someone with a well-diversified portfolio?
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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Q6
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Correlation and Beta You have been provided the following data about the
securities of three firms, the market portfolio, and the risk-free asset:
Security
Expected Return
Standard Deviation
Correlation*
Beta
Firm A
.10
.31
(i)
.85
Firm B
.14
(ii)
.50
1.40
Firm C
.16
(ii)
.65
.35
The market portfolio
.12
.20
(iv)
(v)
The risk-free asset
.05
(vi)
(vii)
(viii)
*With the market portfolio.
a. Fill in the missing values in the table.
b. Is the stock of Firm A correctly priced according to the capital asset pricing
model (CAPM)? What about the stock of Firm B? Firm C? If these securities are
not correctly priced, what is your investment recommendation for someone with
a well-diversified portfolio?
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