Consider the following information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectly correlated.The risk-free rate is 5.50%.StockABCExpected Return10.00%10.90%11.80%Standard Deviation15%15%15%Beta1.51.82.1Let , be the expected return of stock i, ra represent the risk-free rate, b represent the Beta of a stock, and TM represent the market return.Using SML equation, you can solve for the market risk premium which, in this case, equals approximatelyThe beta for Fund P is approximatelyConsider Fund P, which has one third of its funds invested in each of stock A, B, and C.You have the market risk premium, the beta for Fund P, and the risk-free rate.Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock.This information implies that the required rate of return for Fund P is approximatelyWhich of the following is the reason why the standard deviation for Fund P is less than 15%?O Any two stocks in Fund P have a correlation coefficient of 1|The stocks in Fund P each have differing standard deviations.The stocks in Fund P are not perfectly correlated.O The stocks in Fund P are perfectly correlated.

We can determine the market risk premium using Stock A expected returns.

Let , be the expected return of stocki, r represent the risk-free rate, b represent the Beta of a stock, and r represent the market return Using SML equation, you can solve for the market risk premium which, in this case, equals approximately Consider Fund P, which has one third of its funds invested in each of stock A, B, and C. The beta for Fund P is approximately

Let , be the expected return of stocki, r represent the risk-free rate, b represent the Beta of a stock, and r represent the market return Using SML equation, you can solve for the market risk premium which, in this case, equals approximately Consider Fund P, which has one third of its funds invested in each of stock A, B, and C. The beta for Fund P is approximately

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 6P

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Consider the following information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectly correlated. The risk-free rate is 5.50%. Stock Expected Return Standard Deviation Beta A 7.60% 10% 0.6 B 9,70% 10% 1.2 11.80% 10% 1.8 Let ri be the expected return of stock i, FRE represent the risk-free rate, b represent the Beta of a stock, and rM represent the market return. Assume that the market is in equilibrium, with the required rate of returns equal to expected returns. According to the video, which equation most closely describes the relationship between required returns, beta, and the market risk premium? O ri = TRF + O rn = TRE +bx (rM + TRF) On = TRF - bx (rM – TRF) On = TRF + bx (rM - TRF) Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock. Using the equation you just identified, you can solve for the market risk premium which, in this case, equals…
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