Question

Question 2(10 marks) Correlation Matrix Securities Expected Return Standard Deviation Google Microsoft Apple Market Portfolio Google...

Question 2

Correlation Matrix

Securities

Expected

Return

Standard Deviation

Google

Microsoft

Apple

Market Portfolio

Google

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 risk-free interest rate is 3%.

  1. Given the correlation matrix, what is the covariance between Google and the Market?
  1. Given the correlation matrix, what is the beta of Microsoft?

  1. Show that Microsoft is priced according to the CAPM.
  1. What is the expected return and volatility of a portfolio that consists of a long position of $10,000 in Microsoft and a short position of $2,000 in Apple?                              

  

Homework Answers

Answer #1

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 return-risk 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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