d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (B¡) = "PIM , where ơị,ɑm are standard deviations of asset i and market OM portfolio, Pim is the correlation between asset i and the market portfolio)
d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (B¡) = "PIM , where ơị,ɑm are standard deviations of asset i and market OM portfolio, Pim is the correlation between asset i and the market portfolio)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
![d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay
returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard
deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has
standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether
asset A and B are overvalued or undervalued, and explain why.
(Hint: Beta of asset i (B¡) = "PIM , where ơị,ɑm are standard deviations of asset i and market
OM
portfolio, Pim is the correlation between asset i and the market portfolio)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5f0b564f-bdd1-48d6-ab93-d18941f1a006%2Fe35d7f69-ca9f-47cd-9986-335e00bbc9eb%2Frjfgn8m_processed.png&w=3840&q=75)
Transcribed Image Text:d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay
returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard
deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has
standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether
asset A and B are overvalued or undervalued, and explain why.
(Hint: Beta of asset i (B¡) = "PIM , where ơị,ɑm are standard deviations of asset i and market
OM
portfolio, Pim is the correlation between asset i and the market portfolio)
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