d) The return on the risk-free asset is 5%. You are given the following information: Security Firm A Firm B Firm C Market portfolio E(R)-% 10 14 16 12 SD-% 31 ? 65 20 Correlation with Beta Market portfolio ? .50 .35 1 .85 1.40 ? 1 i) What is the correlation between security A and the market portfolio? ii) What is the standard deviation of security B? iii) What is the beta of security C? Give an interpretation of its value? iv) Is the stock of Firm A correctly priced according to the capital asset pricing model (CAPM)? What about the stock of Firm C? If these securities are not correctly priced, what is your investment recommendation for someone with a well-diversified portfolio?

d) The return on the risk-free asset is 5%. You are given the following information: Security Firm A Firm B Firm C Market portfolio E(R)-% 10 14 16 12 SD-% 31 ? 65 20 Correlation with Beta Market portfolio ? .50 .35 1 .85 1.40 ? 1 i) What is the correlation between security A and the market portfolio? ii) What is the standard deviation of security B? iii) What is the beta of security C? Give an interpretation of its value? iv) Is the stock of Firm A correctly priced according to the capital asset pricing model (CAPM)? What about the stock of 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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Question

d) The return on the risk-free asset is 5%. You are given the following
information:
Security
E(R) -%
Firm A
Firm B
Firm C
10
14
16
Market portfolio 12
SD-%
31
?
65
20
Correlation with
Market portfolio
?
.50
.35
1
Beta
.85
1.40
?
1
i) What is the correlation between security A and the market portfolio?
ii) What is the standard deviation of security B?
iii) What is the beta of security C? Give an interpretation of its value?
iv) Is the stock of Firm A correctly priced according to the capital asset pricing
model (CAPM)? What about the stock of 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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