Securities: 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?

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?

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Capital Market Line (CML):

The risk-free rate asset has a return of 5% and a standard deviation of zero and the portfolio has an expected return of 25% and a standard deviation of 4%. 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
= (0.25- 0.05) / (0.04 - 0)
= 5

According to the ...

Solution Summary

Expected rate of return on securities is investigated in this solution, which discusses the capital market line and demonstrates through step by step calculations how to find the expected return on the security.

A portfolio that combines the risk-free asset andthemarketportfolio has an expectedreturn of 22 percent and a standard deviation of 5 percent. The risk-free rate is 4.9 percent, andtheexpectedreturn on themarketportfolio is 19 percent. Assume the capital-asset-pricing model holds.
Question: Whatexpectedrate of

1. Assume ABC are all positively correlated. A fourth stock is being considered for addition to theportfolio, either stock D or stock E. Both D and E have expectedreturns of 12%. If stock D is positively correlated with ABC and E is negatively correlated with ABC, which stock should be added to theportfolio? Why?
2. As

There are three securities in themarket. The following chart shows their possible payoffs.
Probability Return on Return on Return on
States of Outcome Security 1 (%) Security 2 (%) Security 3 (%)
1 0.1 0.25 0.25 0.10
2 0.4 0.20 0.15

Miss Maple is considering two securities, A and B, withthe relevant information given below:
State of Economy Probability Return on Security A Return on Security B
Bear 0.4 3.0 % 6.5%
Bull 0.6 15

1. You are given the following information on two securities, themarketportfolio, andthe risk free rate:
(See attached file for full problem description with chart)
For parts a, b, and c, use the above Table.
a. Draw theSecurityMarket Line.
b. What are the betas of the two securities?
c. Plot the two securities o

Problem 1
Suppose theexpectedreturns and standard deviations of stocks A and B are E(RA) = 0.17, E(RB) = 0.27, σA = 0.12, and σB = 0.21, respectively.
a. Calculate theexpectedreturnand standard deviation of a portfolio that is composed of 35% A and 65% B when thecorrelation between thereturns on A and B is 0.

There are three securities in themarket. The following chart shows their possible payoffs:
State Probability of Return on Return on Return on
Outcome Security1 security2 Security3
1 .15 .25

See attached file for full problem description.
Managerial Finance
Week 4 Dropbox Chapter 6
Stock X a) b) Stock Y a) b)
Probability ReturnRate/Return Stand Dev Probability ReturnRate/Return Stand Dev
0.1 -0.1 0.2 0.02 0.4
0.2 10 0.2 7 1.4
0.4 15 0.3

11. Delilah, Inc. currently pays a $2.25 common stock dividend, with dividends expected to grow at a 4% rate over the long-term. Assuming a risk free rate of 4.25%, an expectedreturn on themarket of 10%, and a stock beta of 0.70, what should be the price of Delilah's stock?
12. Asset A has an expectedreturn of 7% and a