You are not given the expected return of stock X. The correlation of the returns on the stock X a the market portfolio is equal to 0.4. a) What is the beta (6) of stock X?

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
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Problem 1
You are given the following information about stock X and the market portfolio, M:
Riskless Asset (f)
Stock X
Market Portfolio (M)
E(r)
0.04 (4%)
?
0.10
σ
0.00
0.30
0.20
You are not given the expected return of stock X. The correlation of the returns on the stock X and
the market portfolio is equal to 0.4.
a) What is the beta (6) of stock X?
b) Assuming the CAPM holds, what is the expected return on stock X?
c) You have $1,000 to invest in some combination of the risk-free asset, stock X, and the market
portfolio. You are thinking of investing $300 in the risk free asset, $400 in stock X, and $300
in the market portfolio. What is the overall expected return, standard deviation and beta of
this portfolio?
Transcribed Image Text:Problem 1 You are given the following information about stock X and the market portfolio, M: Riskless Asset (f) Stock X Market Portfolio (M) E(r) 0.04 (4%) ? 0.10 σ 0.00 0.30 0.20 You are not given the expected return of stock X. The correlation of the returns on the stock X and the market portfolio is equal to 0.4. a) What is the beta (6) of stock X? b) Assuming the CAPM holds, what is the expected return on stock X? c) You have $1,000 to invest in some combination of the risk-free asset, stock X, and the market portfolio. You are thinking of investing $300 in the risk free asset, $400 in stock X, and $300 in the market portfolio. What is the overall expected return, standard deviation and beta of this portfolio?
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