1. Morgan Stanley economists have determined the states of nature and corresponding returns for both Morgan Stanley stock and the S&P 500 index. What is the covariance of the returns on Morgan Stanley stock with the S&P 500? What is the beta of Morgan Stanley stock?

Probability Morgan Stanley S&P500
Boom Times 0.8 14.30% 14.20%
Bad Times 0.2 -2.70% -6.80%

2. A friend in finance shows you the following two figures. She asks you a few facts about them. S represents the safe asset. M represents the market portfolio.
a. What is the name of the line segment between S and M in Figure 1?

b. What is the name of the line in figure 2?

c. How can one achieve a portfolio with the characteristics of point B in Figure 1?

d. Point X and Point X' are meant to represent Xerox common stock. In Figure 1 Xerox appears to be riskier than the market portfolio. In Figure 2 it seems to be safer. Is there something wrong with the two figures? If so, explain why Xerox cannot appear as shown. If it is possible that the two figures are correct, explain what must be true about Xerox to cause its representation to be in such a different location in the two graphs.

1. Morgan Stanley economists have determined the states of nature and corresponding returns for both Morgan Stanley stock and the S&P 500 index. What is the covariance of the returns on Morgan Stanley stock with the S&P 500? What is the beta of Morgan Stanley stock?
Probability Morgan Stanley S&P500
Boom Times .8 14.3% 14.2%
Bad Times .2 -2.7% -6.8%

Step 1
Let us first calculate mean return, variance of returns and standard deviation of returns for Morgan Stanley and S&P
Morgan Stanley

Morgan Stanley
return Probability return x Probability Difference from mean Difference 2 Prob x Difference 2
14.30% 0.8 11.44% 3.40% 0.001156 0.0009248
-2.70% 0.2 -0.54% -13.60% 0.018496 0.0036992
Total 1.00 10.90% 0.0046240

Expected return= 10.90%
Variance= 0.004624
Standard deviation=√Variance= 6.80% =√0.004624

S&P500

S&P500
return Probability return x Probability Difference from mean Difference 2 Prob x Difference ...

Solution Summary

Answers to 2 questions-one on covariance and beta of Morgan Stanley stock, the other on Capital Market Line and Security Market Line

The beta coefficient of an asset can be expressed as a function of the asset's correlation with the market as follows:
bi=rho iM si / sM
rho iM = correlation between the security's returns and market returns
si= standard deviation of security's returns
sm= standard deviation of market's returns
1. Substitute this expres

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.
What expected rate of return would

A friend in finance shows you the following two figures (see the attached file). He asks you a few facts about them. S represents the safe asset. M represents the market portfolio.
a) What is the name of the line segment between S and M in Figure 1?
b) What is the name of the line segment between S and M in Figure 2?
c) How c

5) The rate on Treasury bills is 4 percent, and the equity risk premium is 10 percent. Use the SML to estimate the return on each of the above stocks.
Security Standard deviation Correlation with market
A 0.30 0.70
B 0.75 0.30
C 0.45 0.50
D 0.50 0.16
6) Maria has decided to invest $5,000 in each of the above

A friend in finance shows you the following two figures (see attachment). He asks you to find about them. S represents the safe asset. M represents the market portfolio.
a) What is the name of the line segment S and M in Figure 1?
b) What is the name of the line segment S and M in Figure 2?
c) How can one achieve a portfolio

Please show all work so I can understand your conclusion.
An asset has a beta of 1.6. The risk-free rate is 6 percent, and the market risk premium is 8 percent. Using the SML, estimate the required rate of return on this asset.

Stock A Stock B Stock C T-Bills Market Port
Exp. Return .19 .15 .09 .07 .18
Variance .0200 .1196 .0205 .0000 .0064
Covariance with
Mkt Portfolio .007 .0045 .0013 .0000 .0064
Calculate each stock's beta based on the information given above.

I need some tips on how to solve the following type of problem. Can you help??
CAPM and Expected Return. Stock A has a beta of .5 and investors expect it to return 5 percent. Stock B has a beta of 1.5 and investors expect it to return 13 percent. Use the CAPM to find the market risk premium and the expected rate of return on

What is the capital market line? Who uses it? Would you use it? Who discovered it? How does the capital market line relate to the security market line?