Now it's time for you to practice what you've learned. 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 3.50%. Stock Expected Return A B с 8.30% 10.70% 13.10% Standard Deviation Beta 1.2 1.8 20% 20% 20% 2.4 Let r; be the expected return of stock i, 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 20%? The stocks in Fund P each have differing standard deviations. The stocks in Fund P are perfectly correlated. Any two stocks in Fund P have a correlation coefficient of 1. The stocks in Fund P are not perfectly correlated.
Now it's time for you to practice what you've learned. 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 3.50%. Stock Expected Return A B с 8.30% 10.70% 13.10% Standard Deviation Beta 1.2 1.8 20% 20% 20% 2.4 Let r; be the expected return of stock i, 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 20%? The stocks in Fund P each have differing standard deviations. The stocks in Fund P are perfectly correlated. Any two stocks in Fund P have a correlation coefficient of 1. The stocks in Fund P are not perfectly correlated.
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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Transcribed Image Text:Now it's time for you to practice what you've learned.
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 3.50%.
Stock Expected Return
A
B
C
8.30%
10.70%
13.10%
Standard Deviation Beta
1.2
20%
20%
20%
The beta for Fund P is approximately
1.8
2.4
Let 7; be the expected return of stock i, TRP 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
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 20%?
The stocks in Fund P each have differing standard deviations.
The stocks in Fund P are perfectly correlated.
Any two stocks in Fund P have a correlation coefficient of 1.
The stocks in Fund P are not perfectly correlated.
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