apter 08 End-of-Chapter Problems w at 10 PM EDT Check My Work (1 remaining) o CA
ID: 2617075 • Letter: A
Question
apter 08 End-of-Chapter Problems w at 10 PM EDT Check My Work (1 remaining) o CAPM, portfolilo risk, and return Coísider the following infrmation for three stocks, stocks A, B, and C. The returns on the three stocks are positively correlated, but they are coefficients is between 0 and 1.) 14% 0.9 9.73 14 1.1 invested in each of the three stocks. The risk-free rate is %, and the market i in equilibrium. (That is, required returns equal expected returns.) a. What is the market risk premium (und 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 11, greater than 14% mL equal to 14%Explanation / Answer
Working note:
1.
Required rate of return of fund P or Expected return of Fund P = (8.87% + 9.73% + 11.45%) / 3
Expected return of Fund P = (8.87% + 9.73% + 11.45%) / 3
Expected return of Fund P = 10.02%
2.
Beta of fund F = (0.9 + 1.1 + 1.5) / 3 = 1.17
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a.
Market risk premium = (expected return – risk free rate)/ Beta
Market risk premium = (10.02% - 5%) / 1.17
Market risk = ~ 4.30%
b.
Beta of fund P = 1.17
(Calculated above in working note 2)
c.
Required return on fund P = 10.02%
(Calculated above working note 1)
d.
Correct option is > I. Less than 14%
Diversification benefit.
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