Question 2
Correlation Matrix 

Securities 
Expected Return 
Standard Deviation 

Microsoft 
Apple 
Market Portfolio 

19.2% 
36% 
1.0 
0.7 
0.6 
0.5 
Microsoft 
21.9% 
35% 
1.0 
0.5 
0.6 

Apple 
12.0% 
25% 
1.0 
0.4 

Market Portfolio 
12.0% 
10% 
1.0 
The riskfree interest rate is 3%.
1.
=Correlation of stock with market*standard deviation of
stock*standard deviation of market
=0.5*36%*10%=0.018
2.
=Correlation of stock with market*standard deviation of
stock/standard deviation of market
=0.6*35%/10%=2.10
3.
required return=risk free rate+beta*(market returnrisk free
rate)=3%+2.10*(12%3%)=21.9000%
As expected return is same as required return, Microsoft is correctly priced
4.
=sqrt((10000/8000*35%)^2+(2000/8000*25%)^2+(10000/8000)*(2000/8000)*35%*25%*0.5)
=42.6193%
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