Suppose that the risk-free rate ry = 0.03, the expected market return µM = 0.11, and the market volatility oM = 0.16. Stock A has beta = 1.2 and diversifiable risk o, = 0.08. Stock B has beta = 0.8 and 0. = 0.03. Stock C has beta = 1.5 and o, = 0.1. Consider a portfolio P which is 45% in Stock A, 25% in Stock B, and 30% in Stock C. (a) Find the value of beta for this portfolio. (b) Assuming CAPM, find the portfolio's expected return up. (c) Find the standard deviation of the portfolio's systematic (or mar- ket) risk.
Suppose that the risk-free rate ry = 0.03, the expected market return µM = 0.11, and the market volatility oM = 0.16. Stock A has beta = 1.2 and diversifiable risk o, = 0.08. Stock B has beta = 0.8 and 0. = 0.03. Stock C has beta = 1.5 and o, = 0.1. Consider a portfolio P which is 45% in Stock A, 25% in Stock B, and 30% in Stock C. (a) Find the value of beta for this portfolio. (b) Assuming CAPM, find the portfolio's expected return up. (c) Find the standard deviation of the portfolio's systematic (or mar- ket) risk.
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 6P
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Suppose that the risk-free rate r, = 0.03, the expected market
return uM = 0.11, and the market volatility oM = 0.16. Stock A has
beta = 1.2 and diversifiable risk o̟ = 0.08. Stock B has beta = 0.8 and
0, = 0.03. Stock C has beta = 1.5 and o̟ = 0.1.
Consider a portfolio P which is 45% in Stock A, 25% in Stock B,
and 30% in Stock C.
(a) Find the value of beta for this portfolio.
(b) Assuming CAPM, find the portfolio's expected return µp.
(c) Find the standard deviation of the portfolio's systematic (or mar-
ket) risk.
(d) Find the standard deviation o, of the diversifiable risk of P. (You
may assume that the diversifiable risks of A,B, and C are uncorrelated.)
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