(a) The market index experienced the following returns over the first 6 months o

Question

(a) The market index experienced the following returns over the first 6 months of this year: Month Return Month Return January 0.68 April -1.71 February 5.43 May -2.44 March 1.12 June 3.58 What is the average return and standard deviation of returns over this six-month period? (6 marks) (b) Security A has an expected rate of return of 25 percent and a beta of 2.5. Security B has a beta of 1.20. If the Treasury note rate is 8 percent, what is the expected rate of return for Security B? (4 marks) (c) What are the two components of a security’s risk? What can an investor do about them (answer is limited within 200 words)? (3 marks)

Explanation / Answer

Month Return Jan 0.68% Feb 5.43% Mar 1.12% Apr -1.71% May -2.44% Jun 3.58% Mean 1.11% SD 3.02% Security A 25% = 8% + 2.5*rm Rm 6.80% Security B 8% + (1.2* 6.8%) 16.16% The 2 components of security risk are systematic risk and unsystematic risk. Systematic risk is market rosk and is non diversifyiable,unsystematic risk is company specific risk and is diversifyiable

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