Question

You have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset a. Fill in the missing values in the table. (Leave no cells blank.be certain to enter 0 wherever required. Do not round Intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Correlation Security FA Expected Return Standard Deviation 0.102 033 0.1421 0.162 0.63 0.12 .191 0.08 0.37 Firm The market portfolio The risk tree ass * With the market portfolio b-1. What is the expected return of Firm A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) Expected return b-2.What is your investment recommendation regarding Firm A for someone with a well- diversified portfolio? Buy Sell b-3. What is the expected return of Firm B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e... 32.16.) Expected rhum 4.What is your investment recommendation regarding Firm B for someone with a well diversified portfolio? Buy b-5. What is the expected return of Firm C? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e... 32.16.) Expected retum

Answer 1

a) Firm A Correlation 0.26 =0.83*0.102/0.33 Firm B Standard deviation 0.38 =1.38*0.142/0.52 Firm C Beta 1.44 -0.37*0.63/0.162 The market portfolio Correlation 1.00 1.00 Beta The risk free asset Standard deviation Correlation 0 Beta b-1) Firm A Expected return 10.81% -5%+0.83*(12%-5%) b-2) CAPM return > Expected return. Sell the Stock. b-3) Firm B Expected return 14.66% -5%+1.38*(12%-5%) b-4) CAPM return > Expected return. Sell the Stock. b-5) Firm C Expected return 15.08% -5%+1.44*(12%-5%) / b-6) CAPM return < Expected return. Buy the Stock.

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