Question

CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The...

CAPM, PORTFOLIO RISK, AND RETURN

Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.)

Stock Expected Return Standard Deviation Beta
A 9.18% 15% 0.8
B 11.02    15    1.2
C 13.32    15    1.7

Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.)

What is the market risk premium (rM - rRF)? Round your answer to two decimal places.
%

What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.
%

Homework Answers

Answer #1

Solution 1:

Market risk premium = (Expected return of stock A – Risk free rate)/ Stock A’s Beta

Market risk premium = (9.18% - 5.5%)/ 0.8

Market risk premium = 4.60%

Solution 2:

Portfolio beta (P) = Stock A beta x Weight of A + Stock B beta x Weight of B + Stock C beta x Weight of C

Portfolio beta (P) = 0.8 x 1/3 + 1.2 x 1/3 + 1.7 x 1/3

Portfolio beta (P) = 1.23

Solution 3:

Portfolio Return (P) = Stock A Return x Weight of A + Stock B Return x Weight of B + Stock C Return x Weight of C

Portfolio Return (P) = 9.18% x 1/3 + 11.02% x 1/3 + 13.32% x 1/3

Portfolio Return (P) = 11.17%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock=A, B, C. Expected Return=9.15 ,11.40, 13.65 Standard deviation:14%, 14, 14 Beta: 0.7, 1.2, 1.7 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6%, and the market is...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 10.10% 16% 0.9 B 11.01    16    1.1 C 13.28    16    1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6%, and...
CAPM, portfolio risk, and return Consider the following information for three stocks, Stocks A, B, and...
CAPM, portfolio risk, and return Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 8.32 % 16 % 0.8 B 10.40 16 1.3 C 12.06 16 1.7 Fund P has one-third of its funds invested in each of the three stocks. The risk-free...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The...
CAPM, PORTFOLIO RISK, AND RETURN Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 9.00% 16% 0.8 B 11.00    16    1.2 C 13.00    16    1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and...
Consider the following information for stocks A, B, and C. The returns on the three stocks...
Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 8.62% 15% 0.7 B 11.29 15 1.3 C 13.07 15 1.7 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium....
Consider the following information for stocks A, B, and C. The returns on the three stocks...
Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock    Expected Return Standard Deviation Beta A 9.64% 14% 0.9    B 10.56 14    1.1    C 13.32    14    1.7 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%,...
Consider the following information for stocks A, B, and C. The returns on the three stocks...
Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 8.32% 16% 0.8 B 9.57    16    1.1 C 11.23    16    1.5 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium....
Excel Online Structured Activity: CAPM, portfolio risk, and return Consider the following information for three stocks,...
Excel Online Structured Activity: CAPM, portfolio risk, and return Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 8.70 % 16 % 0.8 B 10.30 16 1.2 C 11.50 16 1.5 Fund P has one-third of its funds invested in each of the...
Consider the following information for stocks A, B, and C. The returns on the three stocks...
Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 9.30% 14% 0.8 B 10.70    14    1.2 C 12.10    14    1.6 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 6.5%, and the market is in equilibrium....
Consider the following information for stocks A, B, and C. The returns on the three stocks...
Consider the following information for stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 8.50% 14% 0.7 B 10.50 14 1.1 C 12.50 14 1.5 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium....
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT