A portfolio that combines the risk-free asset and the market portfolio has an expected return of 22 percent and a standard deviation of 5 percent. The risk-free rate is 4.9 percent, and the expected return on the market portfolio is 19 percent. Assume the capital-asset-pricing model holds.

Question: What expected rate of return would a security earn if it had a 0.6 correlation with the market portfolio and a standard deviation of 3 percent?

Solution Preview

First, we must calculate the standard deviation of the market portfolio using the Capital Market Line (CML):

The risk-free rate asset has a return of 4.9% and a standard deviation of zero and the portfolio has an expected return of 22% and a standard deviation of 5%. These two points must lie on the Capital Market Line.

The slope of the Capital Market Line is:

Slope of CML = Increase in Expected Return / Increase in Standard Deviation
= (0.22- ...

Solution Summary

In about 350 words, this solution explains the calculation for the expected rate of return of a security given its correlation with the market. All calculations are provided.

42. If theexpectedrate of return on a stock exceeds the required rate
1. The stock is experiencing supernormal growth
2. The stock shoudl be sold
3. The company is probably not trying to maximize price per share
4. The stock is a good buy
5. Dividends are not being declared
(Pick the best answer)

The following is the market situation:
Security Beta ExpectedReturn
A Co. 1.25 19%
B Co. 0.75 15%
Assume that these securities are priced according to the CAPM. What is theexpectedreturn
on the market? Wha

Theexpectedreturn for an investment is 30%. If we know the following information about thereturn distribution of the investment, what return will the investment produce if the economic climate is average?
Climate Return Probability
Poor 20% 0.30
Average

Consider the following two stocks, A and B. Stock A has an expectedrate of return 10% and beta 1,20. Stock B has an expectedrate of return 14% and beta 1,80. Theexpected market rate of return is 9% and the risk free rate is 5%. Security______would be a good buy because________
1. A, It offers an expected excess return of 0

Starlight, Inc. must choose between two asset purchases. The annual rate of return and related probabilities given below summarize the firm's analysis.
Asset A Asset B
Rate of Return Probability Rate of Return Probability
8% 40% 7%

6. Williams & Westrich stock is currently selling for $15.25 per share, and the dividend is expected to continue at 92ยข per share. Management expects the stock to grow at 8%. What is your expectedrate of return if you buy the stock for $15.25?
a. 8.00%
b. 6.33%
c. 14.03%
d. 10.42%

What is theexpectedrate of return for an investment that has the following expected scenario? If there is an 18% probability of a recession, 2.0% return; if there is a 65% probability of a moderate economy, 9.5% return; if there is a 17% probability of a strong economy, 14.2% return.

Company x's stock currently sells for $20.00 a share. It just paid a dividend of $1.00 a share. The dividend is expected to grow at a constant rate of 6% a year. What stock price is expected 1 year from now? What is the required rate of return?

I have 2 finance problems which I need help with. I need step-by-step explanations please. Thanks.
1. A stock has a beta of 1.24. Theexpectedreturn on the market is 11.5% and the risk free rate is 3.4%. What is theexpectedrate of return on the stock?
2. You own a portfolio that has $3,400 invested in Stock A and $4