Suppose you group all the stocks in the world into two 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: Expected ReturnvolatilityValue stock15%14%Growth stock16%20%The risk-free rate is 3%.What is the expected return and volatility of the market portfolio (which is a 50–50 combination of the two portfolios)?Does the CAPM hold in this economy? (Hint: Is the market portfolio efficient?)

The estimates of expected return and standard deviation are used by investors to determine the…

Answered: Suppose you group all the stocks in the…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P: You have observed the following returns over time: Assume that the risk-free rate is 6% and the...

See similar textbooks

Related questions

Question

Suppose you group all the stocks in the world into two 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:

	Expected Return	volatility
Value stock	15%	14%
Growth stock	16%	20%

The risk-free rate is 3%.

What is the expected return and volatility of the market portfolio (which is a 50–50 combination of the two portfolios)?
Does the CAPM hold in this economy? (Hint: Is the market portfolio efficient?)

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions