Question

Hi! I need help with A, B, and C, please. Thanks :)

Excel Online Structured Activity: CAPM, portfolio risk, and return Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta 0.8 8.78 % 10.01 11.65 15 % 15 1.1 1.5 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium. (That is, required returns equal expected returns.) The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. x Open spreadsheet a. What is the market risk premium (rm - FRP)? Round your answer to two decimal places. b. What is the beta of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. c. What is the required return of Fund P? Do not round intermediate calculations. Round your answer to two decimal places. d. Would you expect the standard deviation of Fund P to be less than 15%, equal to 15%, or greater than 15%? I. less than 15% II. greater than 15% III. equal to 15%

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B C D E Stock LA Beta 0.8 Expected Return 8.78% 10.01% 11.65% Standard deviation 15% 15% 15% Weight in Fund P 33.33% 33.33% 33.33% 1.1 1.5 rood von Awn - Risk free rate 5.50% Market risk premium 4.10% b. Beta of Fund P 1.13 Required return of Fund P 10.15% 14 15

Cell reference -

B с Expected Return Stock A B C 0.0878 0.1001 0.1165 Standard deviation Beta Weight in Fund P 0.15 0.8 =1/3 0.15 1.1 =1/3 0.15 1.5 =1/3 =oooo von AwN- Risk free rate 0.055 a. Market risk premium =(C3-C7/E3 b. Beta of Fund P |=SUMPRODUCT(E3:E5,F3:F5) | c. Required return of Fund P =C7+C11*C9 13 14 15

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.