2. 3. Both assets B and C plot on the SML. Asset B has a beta of 1.3 and an expe
ID: 2715928 • Letter: 2
Question
2.
3. Both assets B and C plot on the SML. Asset B has a beta of 1.3 and an expected return of 13.1%. Asset C has a beta of .50 and an expected return of 7.5%. The risk-free rate is 4% and the expected return on the market portfolio is 11%. If you wish to hold a portfolio consisting of assets B and C, and have a portfolio beta equal to 1.0, what proportion of the portfolio must be in asset C?
A. 0.375
B. 0.50
C. 0.625
D. 0.75
4. Correlation, a standardized measure of how stocks perform relative to one another in different states of the economy, has a range from:
A. 0.0 to +10.0.
B. 0.0 to +1.0.
C. -1.0 to +1.0.
D. There is no range; correlation is a calculated number that can take on any value.
5. For purposes of maximum portfolio diversification, which of the following would provide the greatest diversification?
A. Security A with a correlation coefficient of -0.0
B. Security B with a correlation coefficient of 0.0
C. Security C with a correlation coefficient of -0.50
D. Security D with a correlation coefficient of 0.50
6.
__________ is the absence of knowledge of the outcome of an event before it happens.
A. Return
B. Diversification
C. Uncertainty
D. Certainty
Please help with above HW, thanks in advance,
A. 0.375
B. 0.50
C. 0.625
D. 0.75
Explanation / Answer
3.
Expected return of A = Risk free rate + (Market return - Risk free rate )* Beta
= 0.04 + (0.131 - 0.04)*1.3 = 15.83%.
Expected return of A = Risk free rate + (Market return - Risk free rate )* Beta
= 0.04 + (0.075-0.04)*0.05 = 0.0575 or 5.75%.
Difference = 1.30-0.5 = 0.8.
Portion of c = (1-0.5)/0.8 = 0.5/0.8 = 0.625
Therefore, the correct answer is option C.
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