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. (Leave no cells blank - be certain to enter 0 wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Security	Expected Return	Standard Deviation	Correlations	Beta
Firm A	0.101	0.40		0.76
Firm B	0.149		0.59	1.31
Firm C	0.169	0.56	0.44
The market portfolio	0.12	0.20
The risk-free asset	0.05

b-1.	What is the expected return of Firm A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Expected return = ___________ %

What is your investment recommendation regarding Firm A for someone with a well-diversified portfolio?

- Buy

- Sell

What is the expected return of Firm B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return = __________ 5

What is your investment recommendation regarding Firm B for someone with a well-diversified portfolio?

- Sell

- Buy

What is the expected return of Firm C? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return = _________ %

What is your investment recommendation regarding Firm C for someone with a well-diversified portfolio?

- Sell

- Buy

Answer 1

a) Firm A Correlation 0.19 =0.76*0.101/0.4 Firm B Standard deviation 0.33 =1.31*0.149/0.59 Firm C Beta 1.46 =0.44*0.56/0.169 The market portfolio Correlation 1.00 1.00 Beta The risk free asset Standard deviation Correlation Beta 0 b-1) Firm A Expected return 10.32% +5%+0.76*(12%-5%) b-2) CAPM return > Expected return. Sell the Stock. b-3) Firm B Expected return 14.17% -5%+1.31*(12%-5%) b-4) CAPM return < Expected return. Buy the Stock. b-5) Firm Expected return 15.22% -5%+1.46*(12%-5%) b-6) CAPM return < Expected return. Buy the Stock.

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