Suppose you have invested $50,000 in the following four stocks:
Security Amount Invested Beta
Stock A $10,000 0.7
Stock B $15,000 1.2
Stock C $12,000 1.4
Stock D $13,000 1.9
The risk-free rate is 5 % and the expected return on the market portfolio is 18%.
Based on the capital-asset-pricing model, what is the expected return on the above portfolio?
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Please see the attached Excel spreadsheet with your answers. Also, for your reference, here is some information for you regarding the CAPM model:
The CAPM model is a model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.
The general idea behind CAPM is that investors need to be ...
How to calculate the following- expected return and standard deviation of a portfolio, expected return of a stock using capital-asset-pricing model (CAPM),
Week 6 - Problem 1
10.6 Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.17, E(RB) = 0.27, StdDevA = 0.12, and StdDevB = 0.21, respectively.
a. Calculate the expected return and standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation between the returns on A and B is 0.6.
b. Calculate the standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation coefficient between the returns on A and B is -0.6.
c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio?
Week 6 - problem 2
Suppose the expected return on the market portfolio is 14.7 percent and the risk-free rate is 4.9 percent. Morrow Inc.stock has a beta of 1.3 . Assume the capital-asset-pricing model holds.
a. What is the expected return on Morrow's stock?
b. If the risk-free rate decreases to 4 percent, what is the expected return on Morrow's stock?
Week 6 - Problem 3
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 security earn if it had a 0.6 correlation with the market portfolio and a standard deviation of 3 percent?View Full Posting Details