Market portfolio consists only of two stocks: stock A and B. Stock A has an expected return of 7% and a volatility of 20%. Stock B has an expected return of 19% and a volatility of 40%. Both stocks are independent each other. The risk-free rate is 3%. Market portfolio weights for stocks A and B are equal. 1. Is the market in equilibrium or not? Is the market portfolio efficient? 2. Now, a good new for stock B arrives in the market, which leads to price increase of stock B. Right after the new, stock B has an expected return of 15% due to the increase of current stock price. If other assumptions are unchanged, is efficient the market portfolio? 3. If there exists a significant portion of feedback traders among investors who tend to trade following recent market price trend, can the market portfolio be an efficient 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
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Market portfolio consists only of two stocks: stock A and B. Stock A has an expected return
of 7% and a volatility of 20%. Stock B has an expected return of 19% and a volatility of 40%.
Both stocks are independent each other. The risk-free rate is 3%. Market portfolio weights for
stocks A and B are equal.
1. Is the market in equilibrium or not? Is the market portfolio efficient?
2.
Now, a good new for stock B arrives in the market, which leads to price increase of stock
B. Right after the new, stock B has an expected return of 15% due to the increase of current
stock price. If other assumptions are unchanged, is efficient the market portfolio?
3. If there exists a significant portion of feedback traders among investors who tend to trade
following recent market price trend, can the market portfolio be an efficient portfolio?
Transcribed Image Text:Market portfolio consists only of two stocks: stock A and B. Stock A has an expected return of 7% and a volatility of 20%. Stock B has an expected return of 19% and a volatility of 40%. Both stocks are independent each other. The risk-free rate is 3%. Market portfolio weights for stocks A and B are equal. 1. Is the market in equilibrium or not? Is the market portfolio efficient? 2. Now, a good new for stock B arrives in the market, which leads to price increase of stock B. Right after the new, stock B has an expected return of 15% due to the increase of current stock price. If other assumptions are unchanged, is efficient the market portfolio? 3. If there exists a significant portion of feedback traders among investors who tend to trade following recent market price trend, can the market portfolio be an efficient portfolio?
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