8-13: CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for Stocks X, Y, and Z. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta
X 9.00% 15% 0.8
Y 10.75 15 1.2
Z 12.50 15 1.6
Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Fund Q has one-third of its funds invested in each of the three stocks. The risk-free rate is 5 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)
a. What is the market risk premium rM â rRF ?
b. What is the beta of Fund Q?
c. What is the required return of Fund Q?
d. Would you expect the standard deviation of Fund Q to be less than 15%, equal to 15%, or greater than 15%? Explain.
Use your financial calculator, show what the PV,FV,N,I/Y
8-13: CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for Stocks X, Y, and Z. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta
X 9.00% 15% 0.8
Y 10.75 15 1.2
Z 12.50 15 1.6
Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Fund Q has one-third of its funds invested in each of the three stocks. The risk-free rate is 5 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)
a. What is the market risk premium rM â rRF ?
b. What is the beta of Fund Q?
c. What is the required return of Fund Q?
d. Would you expect the standard deviation of Fund Q to be less than 15%, equal to 15%, or greater than 15%? Explain.
Use your financial calculator, show what the PV,FV,N,I/Y
Related questions
CAPM, portfolio risk, and return
Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)
| Stock | Expected Return | Standard Deviation | Beta | ||
| A | 9.52 | % | 15 | % | 0.8 |
| B | 11.72 | 15 | 1.3 | ||
| C | 13.04 | 15 | 1.6 | ||
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.)
What is the market risk premium (rM - rRF)? Round your answer to two decimal places.
%
What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
%
Would you expect the standard deviation of Fund P to be less than 15%, equal to 15%, or greater than 15%?
less than 15%
greater than 15%
equal to 15%
-Select-IIIIIIItem 4
| CAPM, portfolio risk, and return Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)
Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium. (That is, required returns equal expected returns.) A) What is the market risk premium (rM - rRF)? 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. a. less than 15% b. greater than 15% c. equal to 15% | ||||||||||||||||||||||||
CAPM, portfolio risk, and return
Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)
| Stock | Expected Return | Standard Deviation | Beta | ||
| A | 8.78 | % | 16 | % | 0.8 |
| B | 10.42 | 16 | 1.2 | ||
| C | 12.47 | 16 | 1.7 | ||
Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.)
What is the market risk premium (rM - rRF)? Round your answer to two decimal places.
%
What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
%
Would you expect the standard deviation of Fund P to be less than 16%, equal to 16%, or greater than 16%?
< >less than 16%greater than 16%equal to 16%-Select-IIIIIIItem 4
