a) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk- return characteristics of a portfolio consisting of only stocks A and B, and explain why? E(R) E(R) E(R) A A A (A) (B) (C) b) found to be half of the required return (Rs) on stock B. The risk-free rate (R) is one-fourth of the required Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (DA) to beta of B (OB). c) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued and explain why. (Hint: Beta of asset i (B:) = ofoL MiM , where oi,0M are standard deviations of asset i and market portfolio, Pim is the correlation between asset i and the market portfolio)
a) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk- return characteristics of a portfolio consisting of only stocks A and B, and explain why? E(R) E(R) E(R) A A A (A) (B) (C) b) found to be half of the required return (Rs) on stock B. The risk-free rate (R) is one-fourth of the required Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (DA) to beta of B (OB). c) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued and explain why. (Hint: Beta of asset i (B:) = ofoL MiM , where oi,0M are standard deviations of asset i and market portfolio, Pim is the correlation between asset i and the market portfolio)
Chapter6: Risk And Return
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:a)
The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and
standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-
return characteristics of a portfolio consisting of only stocks A and B, and explain why?
E(R)
E(R)
E(R)
A
A
A
(A)
(B)
(C)
b)
found to be half of the required return (Rs) on stock B. The risk-free rate (R) is one-fourth of the required
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is
return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (DA) to beta of B
(OB).
c)
Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay
returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard
deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has
standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A
and B are overvalued or undervalued and explain why.
(Hint: Beta of asset i (B:) = ofoL MiM , where oi,0M are standard deviations of asset i and market portfolio,
Pim is the correlation between asset i and the market portfolio)
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