Suppose you group all the stocks in the world into mutually exclusive portfolios (each stock is in only one portfolio): growth stocks and value stocks. Suppose the two portfolios have equal size (in terms of total value), a correlation of 0.5, and the following characteristics: The risk free-rate is 2%. a. What is the expected return and volatility of the market portfolio (which is a 50-50 combination of the two portfolios)? b. Calculate the Sharpe ratios of the value stock, growth stock, and market portfolio. c. Does the CAPM hold in this economy? (Hint: Is the market portfolio efficient?)
Suppose you group all the stocks in the world into mutually exclusive portfolios (each stock is in only one portfolio): growth stocks and value stocks. Suppose the two portfolios have equal size (in terms of total value), a correlation of 0.5, and the following characteristics: The risk free-rate is 2%. a. What is the expected return and volatility of the market portfolio (which is a 50-50 combination of the two portfolios)? b. Calculate the Sharpe ratios of the value stock, growth stock, and market portfolio. c. Does the CAPM hold in this economy? (Hint: Is the market portfolio efficient?)
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:Suppose you group all the stocks in the world into mutually exclusive portfolios (each stock is in only one portfolio): growth stocks and value stocks. Suppose the two portfolios have equal size (in terms of
total value), a correlation of 0.5, and the following characteristics: The risk free-rate is 2%.
a. What is the expected return and volatility of the market portfolio (which is a 50-50 combination of the two portfolios)?
b. Calculate the Sharpe ratios of the value stock, growth stock, and market portfolio.
c. Does the CAPM hold in this economy? (Hint: Is the market portfolio efficient?)
a. What is the expected return and volatility of the market portfolio (which is a 50-50 combination of the two portfolios)?
The expected return of the market portfolio is %. (Round to two decimal place.)
Data table
C
(Click on the following icon in order to copy its contents into a spreadsheet.)
Expected Return
Value Stocks
Growth Stocks
Print
14%
15%
Done
Volatility
12%
29%
X
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