Question

Excel Online Structured Activity: CAPM, portfolio nisk, and retum 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 8.9496 15 % 10.66 15 1238 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 Open spreadsheet

Answer 1

a) Using CAPM, E(R) = Rf + beta x MRP

=> 8.94% = 5.5% + 0.8 x MRP

=> MRP = 4.30%

b) Beta of Fund P = 1/3 x (0.8 + 1.2 + 1.6) = 1.2

c) Required Return = Rf + beta x MRP = 5.5% + 1.2 x 4.30% = 10.66%

d) Less than 15% due to the benefit of diversification.