Consider the following information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectly correlated.The risk-free rate is 5.50%.StockABCExpected Return10.00%10.90%11.80%Standard Deviation15%15%15%Beta1.51.82.1Let , be the expected return of stock i, ra represent the risk-free rate, b represent the Beta of a stock, and TM represent the market return.Using SML equation, you can solve for the market risk premium which, in this case, equals approximatelyThe beta for Fund P is approximatelyConsider Fund P, which has one third of its funds invested in each of stock A, B, and C.You have the market risk premium, the beta for Fund P, and the risk-free rate.Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock.This information implies that the required rate of return for Fund P is approximatelyWhich of the following is the reason why the standard deviation for Fund P is less than 15%?O Any two stocks in Fund P have a correlation coefficient of 1|The stocks in Fund P each have differing standard deviations.The stocks in Fund P are not perfectly correlated.O The stocks in Fund P are perfectly correlated.

We can determine the market risk premium using Stock A expected returns.

Let , be the expected return of stocki, r represent the risk-free rate, b represent the Beta of a stock, and r represent the market return Using SML equation, you can solve for the market risk premium which, in this case, equals approximately Consider Fund P, which has one third of its funds invested in each of stock A, B, and C. The beta for Fund P is approximately

Let , be the expected return of stocki, r represent the risk-free rate, b represent the Beta of a stock, and r represent the market return Using SML equation, you can solve for the market risk premium which, in this case, equals approximately Consider Fund P, which has one third of its funds invested in each of stock A, B, and C. The beta for Fund P is approximately

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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Concept explainers

Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.

Question

Consider the following information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectly correlated.
The risk-free rate is 5.50%.
Stock
A
B
C
Expected Return
10.00%
10.90%
11.80%
Standard Deviation
15%
15%
15%
Beta
1.5
1.8
2.1
Let , be the expected return of stock i, ra represent the risk-free rate, b represent the Beta of a stock, and TM represent the market return.
Using SML equation, you can solve for the market risk premium which, in this case, equals approximately
The beta for Fund P is approximately
Consider Fund P, which has one third of its funds invested in each of stock A, B, and C.
You have the market risk premium, the beta for Fund P, and the risk-free rate.
Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock.
This information implies that the required rate of return for Fund P is approximately
Which of the following is the reason why the standard deviation for Fund P is less than 15%?
O Any two stocks in Fund P have a correlation coefficient of 1|
The stocks in Fund P each have differing standard deviations.
The stocks in Fund P are not perfectly correlated.
O The stocks in Fund P are perfectly correlated.

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