Question

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 in equilibrium. (That is, required returns equal expected returns.) What is the market risk premium (rM - rRF)? Round your answer to two decimal places. B. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. C. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places.

Answer #1

As given in question, market is in equilibrium and required rate of return is equal to expected rate of return.

By CAPM, Required rate of Return = Risk free rate + Beta * Market Risk Premium

Substitute the required or expected rate of return, risk free rate and beta for any of the three stocks,

9.15% = 6% + 0.7 * market Risk Premium

**Market Risk
Premium = 4.50%** --> Answer

Beta of a portfolio is a weighted average of Betas of individual constituents of the portfolio.

Beta = (1/3) * 0.7 + (1/3) * 1.2 + (1/3) * 1.7 = **1.20** -->
Answer

Required Rate of Return for Fund P can be calculated by using the CAPM equation and the values that we calculated above.

Expected Return for Fund P = 6% + (1.20 * 4.50%) = **11.4%** -->
Answer

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...

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 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
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 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 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 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....

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....

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 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
8.78%
14%
0.8
B
10.83
14
1.3
C
12.47
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%, and the market is in
equilibrium....

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