Question

d Search this course Brigham Chapter 08 End-of-Chapter Problems X Check My Work (1 remaining) Problem Walk-Through Problem 8-13 CAPM, portfolio risk, and retun Consider the following information for three stocks, Stocks A, 8, 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 A 8.86 % 15 % 0.7 B 11.74 15 1.3 C 13.66 15 1.7 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.) a. What is the market risk premium (rH-RF)? Round your answer to two decimal places. b. What is the beta of Fund P? Do not round intermediate caloulations. 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% 11. greater than 15% III. equal to 15% -Select- ) Check My Work (i remaining) MacBook Air

Answer 1

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

Beta Stock Expected Return А 8.86% BT 11.74% C 13.66% Standard deviation 15% 15% 15% 0.7 1.3 1.7 Weight in Fund P 33.33% 33.33% 33.33% Risk free rate 5.50% Market risk premium 4.80% Beta of Fund P 1.23 14 C. Required return of Fund P 11.42% 16 d. I. less than 15%

Cell reference -

DE Stock Expected Return Standard deviation Beta Weight in Fund P 0.0886 0.1174 0.1366 0.15 0.15 B 0.7 1.3 1.7 1=1/3 =1/3 =1/3 0.15 Risk free rate 0.055 10 a. Market risk premium =(C4-C8)/E4 12 b. Beta of Fund P =SUMPRODUCT(E4:E6, F4:F6) 14 . Required return of Fund P =C8+C12*010 15 16 d. I. less than 15% 19

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