the three stocks are positively correlated, but they are not perfectly correlated. (That each of the correlation coefficients between 0 and 1.) Stock Expected Return Standard Deviation Beta A 9.96% 14% 0.8 B 11.45 14 1.1 13.43 14 1.5 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (rM - TRF)? Round your answer to two decimal places. % b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
the three stocks are positively correlated, but they are not perfectly correlated. (That each of the correlation coefficients between 0 and 1.) Stock Expected Return Standard Deviation Beta A 9.96% 14% 0.8 B 11.45 14 1.1 13.43 14 1.5 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6%, and the market is in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (rM - TRF)? Round your answer to two decimal places. % b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
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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ANSWER EACH PART CORRECTLY PLEASE! PLEASE CHECK
![### Stocks Analysis
Consider the following information for stocks A, B, and C. The returns on these three stocks are positively correlated, but they are not perfectly correlated. (Each of the correlation coefficients is between 0 and 1.)
| Stock | Expected Return | Standard Deviation | Beta |
|-------|-----------------|--------------------|------|
| A | 9.96% | 14% | 0.8 |
| B | 11.45% | 14 | 1.1 |
| C | 13.43% | 14 | 1.5 |
Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6%, and the market is in equilibrium. (Required returns equal expected returns.)
#### Questions
a. **Market Risk Premium (\(r_m - r_{RF}\)):**
What is the market risk premium? Round your answer to two decimal places.
\( \_\_\_.\_\_% \)
b. **Beta of Fund P:**
What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
\( \_\_\_.\_\_ \)
c. **Required Return of Fund P:**
What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
\( \_\_\_.\_\_% \)
d. **Standard Deviation of Fund P:**
Would you expect the standard deviation of Fund P to be less than 14%, equal to 14%, or greater than 14%?
- I. Less than 14%
- II. Greater than 14%
- III. Equal to 14%
\[ \text{-Select-} \]
### Explanation for Educational Context
This table and accompanying questions are designed to help students understand how to analyze stocks' expected returns, standard deviations, and betas to gauge a fund's risk and return potential. The correlation between stocks and its impact on a fund's overall beta and standard deviation are critical concepts. Students are also encouraged to calculate the market risk premium, which aids in determining the expected return of an investment over the risk-free rate. These calculations are essential for making informed investment decisions.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F552bce27-2e42-4405-9478-45c26e7ea34f%2F806eeb9b-04b5-4d2c-9a3b-c843aebfca15%2Fzghzzv_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Stocks Analysis
Consider the following information for stocks A, B, and C. The returns on these three stocks are positively correlated, but they are not perfectly correlated. (Each of the correlation coefficients is between 0 and 1.)
| Stock | Expected Return | Standard Deviation | Beta |
|-------|-----------------|--------------------|------|
| A | 9.96% | 14% | 0.8 |
| B | 11.45% | 14 | 1.1 |
| C | 13.43% | 14 | 1.5 |
Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6%, and the market is in equilibrium. (Required returns equal expected returns.)
#### Questions
a. **Market Risk Premium (\(r_m - r_{RF}\)):**
What is the market risk premium? Round your answer to two decimal places.
\( \_\_\_.\_\_% \)
b. **Beta of Fund P:**
What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
\( \_\_\_.\_\_ \)
c. **Required Return of Fund P:**
What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
\( \_\_\_.\_\_% \)
d. **Standard Deviation of Fund P:**
Would you expect the standard deviation of Fund P to be less than 14%, equal to 14%, or greater than 14%?
- I. Less than 14%
- II. Greater than 14%
- III. Equal to 14%
\[ \text{-Select-} \]
### Explanation for Educational Context
This table and accompanying questions are designed to help students understand how to analyze stocks' expected returns, standard deviations, and betas to gauge a fund's risk and return potential. The correlation between stocks and its impact on a fund's overall beta and standard deviation are critical concepts. Students are also encouraged to calculate the market risk premium, which aids in determining the expected return of an investment over the risk-free rate. These calculations are essential for making informed investment decisions.
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