Question

The standard deviation of a stock’s returns is 24% and the correlation of its returns with the returns of the market portfolio is 0.4. The standard deviation of the returns of the market portfolio is 16%. The expected return of the market portfolio is 11% and the risk-free rate of return is 3%. The stock is currently priced at $45 and you expect the price to be $50 in one year. The stock is not expected to pay any dividends during the year.

(a) [10 points] What is the beta of the stock?

(b) [5 points] What is the equilibrium expected return of the stock?

(c) [5 points] What the expected return of the stock based on your information?

(d) [10 points] Would you buy the stock?

Answer 1