Stock Expected Return Standard Deviation Beta 9.00% 15% 0.8 Y 10.75 15 1.2 12.50 15 1.6 Fund Q has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) Rr.F -5.5
Stock Expected Return Standard Deviation Beta 9.00% 15% 0.8 Y 10.75 15 1.2 12.50 15 1.6 Fund Q has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) Rr.F -5.5
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Stock
Expected Return
Standard Deviation
Beta
9.00%
15%
0.8
Y
10.75
15
1.2
12.50
15
1.6
Fund Q has one-third of its funds invested in each of the three stocks.
The risk-free rate is 5.5%, and the market is in equilibrium. (That is,
required returns equal expected returns.)
RRF-5.5
What is the market risk premium rM- rRp?
a.
b. What is the beta of Fund Q?
What is the required return of Fund Q?
d. Would you expect the standard deviation of Fund Q to be less than
15%, equal to 15%, or greater than 15%? Explain.
С.
Transcribed Image Text:8-13
CAPM, PORTFOLIO RISK, AND RETURN Consider the following informa-
tion for Stocks X, Y, and Z. The returns on the three stocks are positively
correlated, but they are not perfectly correlated. (That is, each of the corre-
lation coefficients is between 0 and 1.)
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