Question

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. (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.
%

Answer 1

Given that Market is in Equilibrium

Thus Expected Ret = Required Return

Required Return = Rf + Beta ( Rm - Rf)

Req ret of A = 5% + 0.8 ( Rm - Rf )

Req ret of B = 5% + 1.1 ( Rm - Rf )

Market is in Equilibrium, Thus

8.32% = 5% + 0.8 ( Rm - Rf )

9.57% = 5% + 1.1 ( Rm - Rf )

On solvinh Them

0.3 ( Rm - Rf ) = 1.25%

Rm - Rf = 1.25% / 0.3

= 4.17%

Beta of fund = Wtd avg beta of securities in The fund

Required Ret of Fund = Rf + Fund Beta ( Rm - Rf )

= 5% + 1.1333 ( 4.17%)

= 5% + 4.726%

= 9.726%