a) Consider these three stock returns with the following annualised characteristics: Stock A Stock B Stock C Expected Return Standard deviation 16% 10% 3% Stock A Stock B Stock C 26% 22% 11% According to the Capital Asset Pricing Model (CAPM), which stock is a better buy, when the market's expected return is 8%, and risk-free rate is 4%? What is the alpha of each stock? Plot the Security Market Line (SML) and each stock's risk-return point on one graph. Stock A 1 0.4 0.2 b) Now suppose that the same stock returns have the following correlation matrix: Beta Stock B 1.5 1.1 0.3 1 0.3 Stock C 1 Weights 55% 35% 10% If we form a three-stock portfolio by investing 55%, 35% and 10% in Stock A, B and C, respectively, what is the expected return and variance of this portfolio?

a) Consider these three stock returns with the following annualised characteristics: Stock A Stock B Stock C Expected Return Standard deviation 16% 10% 3% Stock A Stock B Stock C 26% 22% 11% According to the Capital Asset Pricing Model (CAPM), which stock is a better buy, when the market's expected return is 8%, and risk-free rate is 4%? What is the alpha of each stock? Plot the Security Market Line (SML) and each stock's risk-return point on one graph. Stock A 1 0.4 0.2 b) Now suppose that the same stock returns have the following correlation matrix: Beta Stock B 1.5 1.1 0.3 1 0.3 Stock C 1 Weights 55% 35% 10% If we form a three-stock portfolio by investing 55%, 35% and 10% in Stock A, B and C, respectively, what is the expected return and variance of this portfolio?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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