Question

A stock you are looking at has generated the following annual returns: 13.2%, -11.4% and 7.2%. What was the standard deviation of its returns? Answer in percent, rounded to two decimal places (e.g., 4.32% = 4.32).

What is the CAPM required return of a portfolio with 43% invested in the market portfolio, 14% invested in risk-free assets, and the rest invested in a stock with a beta of 2.4? The risk free rate is 0.7% and the expected market risk premium is 6.0%. Answer in percent, rounded to two decimal places.

Answer 1

Q1 )  

	X	Deviation (X-mean)	Dev^2
1	13.2	10.2	104.04
2	-11.4	-14.4	207.36
3	7.2	4.2	17.64
Total	9		329.04
Mean of X( %) =	9/3
		3
Standard deviation(%) =	Squareroot of sum of (X-mean)^2
		Sqaurerootof (329.04/3)
		10.47

Q 2)

  

	Propotion	Return	Propotion * Return
Market portfolio	43%	6.7	2.881
Risk free asset	14%	0.7	0.098
Stock	43%	15.1	6.493
TOTAL	100%		9.472

Required return for the stock % =	Rf + Beta * Market risk premium
			0.7% + 2.4*6%
		15.1 %
Market rate of return =	Rf + Market risk premium
			0.7%+6%
			6.70%

return of portfolio = 9.47 %