Your portfolio consists of two stocks. Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return 6% 22% Aggressive Stock -3% 40% Defensive Stock 8% 11% The probability of the pessimistic (optimistic) scenario is 90% (10%) and the risk-free rate is 3%. What is the equation of SML and should you increase or decrease the weights of these two stocks in your portfolio? Please keep 2 decimals in your answer.

Your portfolio consists of two stocks. Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Market Return 6% 22% Aggressive Stock -3% 40% Defensive Stock 8% 11% The probability of the pessimistic (optimistic) scenario is 90% (10%) and the risk-free rate is 3%. What is the equation of SML and should you increase or decrease the weights of these two stocks in your portfolio? Please keep 2 decimals in your answer.

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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We know that two stocks A and B are correctly priced by the CAPM model. For A, the expected return is 12%, and the beta is 1.5; for B, the expected return is 6%, and the beta is 0.5. Based on this information, what is the risk free rate and expected market return? Select one: A. 3%; 9% B. 3%; 6% C. 2%; 8% D. 4%; 10%
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An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 17% and a standard deviation of return of 28%. Stock B has an expected return of 15% and a standard deviation of return of 15%. The correlation coefficient between the returns of A and B is 0.8. The risk-free rate of return is 3.2%. What is the expected return on the optimal risky portfolio? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
Consider the following information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectly correlated. The risk-free rate is 5.50%. Stock A B C Expected Return 10.00% 10.90% 11.80% Standard Deviation 15% 15% 15% Beta 1.5 1.8 2.1 Let , be the expected return of stock i, ra represent the risk-free rate, b represent the Beta of a stock, and TM represent the market return. Using SML equation, you can solve for the market risk premium which, in this case, equals approximately The beta for Fund P is approximately Consider Fund P, which has one third of its funds invested in each of stock A, B, and C. You have the market risk premium, the beta for Fund P, and the risk-free rate. Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock. This information implies that the required rate of return for Fund P is approximately Which of the following is the reason why the…
Consider the following table, which gives a security analyst’s expected return on two stocks and the market index in two scenarios: Scenario Probability Market Return Aggressive Stock Defensive Stock 1 0.5 6% 2.0% 5.0% 2 0.5 20 32 15 Required: a. What are the betas of the two stocks? (Round your answers to 2 decimal places.) b. What is the expected rate of return on each stock?
Solve this practice problem in the 2 pictures below
Stock A has a beta of 1.30, and its required return is 11.35%. Stock B's beta is 0.80. If the risk-free rate is 2.90%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) Do not round your intermediate calculations. a. 8.10% b. 6.50% c. 7.56% d. 8.45% e. 8.77%
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