ecurity A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of -0.73% with a standard deviation of 20%, and a correlation with the market of -0.67. The standard deviation of rM is 12%. a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.) b. What are the beta coefficients of A and B? Calculations are necessary. c. If the risk-free rate is 6%, what is the value of r

ecurity A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of -0.73% with a standard deviation of 20%, and a correlation with the market of -0.67. The standard deviation of rM is 12%. a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.) b. What are the beta coefficients of A and B? Calculations are necessary. c. If the risk-free rate is 6%, what is the value of r

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 2Q: Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a...

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Security A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of -0.73% with a standard deviation of 20%, and a correlation with the market of -0.67. The standard deviation of r_M is 12%.

a.	To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.)
b.	What are the beta coefficients of A and B? Calculations are necessary.
c.	If the risk-free rate is 6%, what is the value of r_M?

Definition Definition Model that illustrates the correlation between the expected return and risk of capital investment in stock. According to this model, the expected rate of return on equity is equal to the risk-free return added to a risk premium, which is based on the stock beta.

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