Question

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 rate is 5%, and the market is in equilibrium. (That is, required returns equal expected returns.)

- What is the market risk premium (r
_{M}- r_{RF})? 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.

%

Answer #1

a Using stock A data

As per CAPM |

expected return = risk-free rate + beta * (Market risk premium) |

8.32 = 5 + 0.8 * (Market risk premium%) |

Market risk premium% = 4.15 |

b

Weight of A = 0.3333 |

Weight of B = 0.3333 |

Weight of C = 0.3333 |

Expected return of Fund p = Weight of A*Expected return of A+Weight of B*Expected return of B+Weight of C*Expected return of C |

Expected return of Fund p = 8.32*0.3333+10.4*0.3333+12.06*0.3333 |

Expected return of Fund p = 10.26 |

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=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
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 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...

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 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 8.62% 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....

onsider 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 8.74% 16% 0.9 B 9.98 16 1.2 C 12.06 16 1.7 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
8.78%
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....

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%,...

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