Excel Online Structured Activity: CAPM, portfolio risk, and return 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 9.22 % A 16 % 0.8 11.08 16 1.2 C 12.94 16 1.6 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.) 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. Open spreadsheet a. What is the market risk premium (rM-rRE)? Round your answer to two decimal places b. What is the beta of Fund P? Do not round intermediate calculations. 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 16%, equal to 16%, or greater than 16%? . less than 16% lI. greater than 16% III. equal to 16% A F G н К L CAPM, portfolio risk, and 1 retum Risk-Free Rate, rRF 5.50% Stock A Formula Stock B Formula Stock C Formula Expected Return 9.22% 11.08% 12.94% Standard Deviation 16.00% 16.00% 16,00% Beta 0.80 120 160 Market Risk Premium, RPM #N/A #N/A #N/A 11 12 0.333333 % Stock in Fund P 0.333333 0.333333 Beta of Fund P #N /A 16 Required Return of FundP #N/A. 17 18 Expected Return of Fund P #N/A 19 20. ш B

2. Consider the following expected returns, volatilities, and correlations: Expected Standard Stock Return Deviation Correlation with Vital Correlation with Mital Correlation with Pital Vital 14% 6% 1.0 -1.0 0.0 Mital 44% 24% -1.0 1.0 0.7 Pital 23% 14% 0.0 0.7 1.0 a. Imagine a portfolio comprising solely of Vital and Mital. What portion of should be allocated to Vital stock to ensure a risk-free investment? your investment b. What is the portfolio's volatility when holding a $10,000 long position in Pital and a $2000 short position in Mital? wwwww c. In a market, there are two securities, Artis and Brotis. Currently, the price of Artis stands at £50. Looking ahead, the price of Artis next year will be £40 during a recession, £55 in normal economic times, and £60 in an expanding economy. The probabilities associated with recession, normal times, and expansion are 0.1, 0.8, and 0.1, respectively. Artis does not pay dividends and has a correlation of 0.8 with the market. On the other…

Considering the attached set of securities and portfolio returns: Find the combination of the weights that minimizes CV of the portfolio.  How does the CV of the optimal portfolio compare with the CVs of its constituents?

Suppose securities A, B, and C have the following expected return and risk.                                                     Stock           Expected return                           Risk  A                                8%                                  6%          B                                7%                                  9%          C                              13%                                 9%          What is the coefficient of variation for stock A?