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.

Security Expected Return Standard Deviation Correlation* Beta 0.21 Firm A 0.120 0.96 Firm B 0.130 040 1.51 Firm C 0.76 0.25 0.111 The market portfolio The risk-free asset 0.12 0.21 0.05 * With the market portfolio

b-1.	What is the expected return of Firm A?

b-2.	What is the expected return of Firm B?

b-3.	What is the expected return of Firm C?

Answer 1

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

ДА B F G 2 a. Standard deviaton Beta 0.21 0.79 Security Firm A Firm B Firm C The Market The risk free asset Expected return 0.120 0.130 0.111 0.120 0.050 Correlation 0.96 0.40 0.25 0.00 0.00 0.76 0.96 1.51 0.90 1.00 0.00 0.21 0.00 Pim * Oi Bi= Om 11 12 b. 13 14 Expected Return of Firm A Expected Return of Firm B Expected Return of Firm C 0.1172 0.1557 0.1133 17

Cell reference -

A B C D E F 2 a. Security Firm A Firm B Firm C The Market The risk free asset nmooooo Expected return Standard deviaton 0.12 0.21 0.13 = (F4*D6)/E4 0.111 0.76 0.21 0 Correlation Beta =(F3*D6)/D3 0.96 0.4 1.51 0.25 =(E5*D5/D6 0.12 0.05 0 Bis Pim *; Om 13 12 b. Expected Return of Firm A =C7+F3*(C6-C7) Expected Return of Firm B =C7+F4* (C6-07) 14 Expected Return of Firm C =C7+F5*(C6-07) 15 16 17

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