Question

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 A 8.43 % 16 % 0.7 B 10.88 16 1.2 с 12.35 16 1.5 Fund P has one-third of its funds invested in each of the three stocks. The risk-free rate is 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.

Answer 1

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07:11 C w ENG 70 01-08-2020 35 X OB45 fc . NR NS NT NU NV NW NX NY NZ ОА OB OC OD ОЕ OF OG 40 41 AS MARKET IS IN EQUILIBRIUM, WE CAN TAKE ANY STOCK AND FIND OUT RISK PREMIUM WE TAKE STOCK A 42 43 44 45 46 REQUIRED RETURN = Rf + beta(Rm-Rf) 8.43% = 5% +0.7(Rm-Rf) 3.43% = 0.7 (Rm-Rf) 4.9% = (Rm-Rf) Rm-Rf = RISK PREMIUM = 4.90% 47 48 a 49 50 b AS ALL STOCKS ARE EQUAL WEIGHTED BETA OF FUND P = (0.7 +1.2 + 1.5)/3 = 1.1333 1.13 [ROUNDED TO 2 DECIMALS] 51 52 53 C REQUIRED RETURN = Rf + BETA(Rm-Rf) REQUIRED RETURN = 5% + 1.1333(4.90%) = 10.55% 54 55 56 d 57 58 AS CORRELATION IS BETWEEN O TO 1 AND ALL STOCKS ARE EQUALLY WEIGHTED AND ALL HAVE EQUAL STANDARD DEVIATION LESS THAN 16% 59 - STANDARD DEVIATION OF FUND WILL BE LESS THAN 16% 60 61 62 KE CAPM UTILITY, SHARPE, beta coNvexity DGM | beta VAR port future INDEX WACC HEDGE INTL CAP BUD Sheet11 SANDI ... +