You are given the following data on three securities. A, Br and the market. My N

Question

You are given the following data on three securities. A, Br and the market. My Note: The risk-free rate is RF = 5% Compute the correlation between A and the market, and B and the market. b. Based on your answer to part (a), which of the two securities, A or B, is better to be combined into a portfolio with M? Explain briefly. Compute the expected return and standard deviation for a portfolio formed between M and your choice in part (b). Then compute the weighted-average standard deviation of this portfolio and explain why the portfolio's actual standard deviation is less than just holding any of the three securities, all of which have a standard deviation of 15% and an expected return of 10%. Compute the systematic risk (beta)CAPM expected return for your choice in part (b). Why is it less than 10%? Explain in the context of systematic and total risk.

Explanation / Answer

AA-- Meaning and definition of systematic risk Systematic risk refers to the risk intrinsic to the complete market or the complete market segment. Systematic risk is also sometimes referred as

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