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- (c) Explain why, in general, the portfolio risk is lower than the weighted average of individual stocks’ risk. (d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates ofreturn of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.Provide short answers to the following questions i) The covariance between stock A and market return is 135. The standard deviation of market’s return is15%. What is the beta of stock A?l) Is it true that a market which is efficient in its semi-strong form is automatically efficient in its weakform?The expected return on the Market Portfolio M is E(RM)=15%, the standard deviation is sM=25% and the risk-free rate is Rf=5%. a. Suppose that stock X has standard deviation sX=30%, and correlation with the market portfolio rXM=0.5. Compute bX and E(RX) (the beta and the expected return of stock X) according to the Market Model (ie: alpha equals zero under the Market Model). b. Suppose that stock Y has standard deviation sy=15%, and correlation with the market portfolio rYM=-0.1. Compute bY and E(RY) (the beta and the expected return of stock Y) according to the Market Model (ie: alpha equals zero under the Market Model). c. Compute the beta of a portfolio composed 65% of stock X and 35% of stock Y.
- USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM Stock Rit Rmt ai Beta C 12 10 0 0.8 E 10 8 0 1.1 Rit = return for stock i during period t Rmt = return for the aggregate market during period t What is the abnormal rate of return for Stock C during period t using only the aggregate market return (ignore differential systematic risk)?Provide short answers to the following questions h) If the standard deviation of a stock’s return is 5% and its expected return is 8%, what it the C.V.? i) The covariance between stock A and market return is 135. The standard deviation of market’s return is15%. What is the beta of stock A?l) Is it true that a market which is efficient in its semi-strong form is automatically efficient in its weakform?Assume CAPM holds. What is the correlation between an efficient portfolio and market portfolio? a. 1 b.-1 c.0 d. Not enough information Assume CAPM holds. The risk-free rate is 1% and the expected return on the portfolio is 5%. What is the expected return of a stock with a beta of 2? 70%
- Suppose that the index model for stocks A and B is estimated from excess returns with the following results:RA = 3% + .7RM + eARB = −2% + 1.2RM + eBσM = 20%; R-squareA = .20; R-squareB = .12What is the covariance between each stock and the market index?In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei) equal to 20% and 40 securities? A. 0.5% B. 3.16% C. 3.54% D. 12.5% E. 625%Find the Expected Return on Market Portfolio given that the Expected Return on Stock Y is 0.156 and Risk Free Rate is 6% and the Beta for Stock Y is 0.5 Select one: a. 0.2520 b. None of the options C. 0.17 d. 0.1320 e. 0.3720
- Suppose we have the following information: Securit Amount Invested Expected Return Beta Stock A RM1 ,OOO 8% 0.80 Stock B RM2,OOO 12% 0.95 Stock C RM3,OOO 15% 1.10 Stock D RM4,OOO 18% a) Compute the expected return on this portfolio. b) Calculate the beta of the portfolio. c) Does this portfolio have more or less systematic risk than an average asset? Explain.Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratioof betaof A(A) tobeta of B(B). Thank you for your help.(1) if stock 1 provides 10% rate of return and stock 2 expects 30% rate of return. what can we say about this scenerio regarding the consistency in the efficent market hypo? which stock (if any) is more risky?
