Problem 3: Suppose the market portfolio has an expected return of 10% and astandard deviation of returns of 25%. The risk-free rate is 5%. Assume that theCAPM holds.a) What is the expected return of a stock that has a beta of 2?b) If a stock has an expected return of 15% and a standard deviation ofreturns of 70%, what fraction of the stock’s variance representsidiosyncratic risk?c) What is the expected return of the “best” portfolio that has a standarddeviation of returns of 70%? That is, how high an expected return canyou get if you are willing to hold a portfolio with σp = 70%?
Problem 3: Suppose the market portfolio has an expected return of 10% and astandard deviation of returns of 25%. The risk-free rate is 5%. Assume that theCAPM holds.a) What is the expected return of a stock that has a beta of 2?b) If a stock has an expected return of 15% and a standard deviation ofreturns of 70%, what fraction of the stock’s variance representsidiosyncratic risk?c) What is the expected return of the “best” portfolio that has a standarddeviation of returns of 70%? That is, how high an expected return canyou get if you are willing to hold a portfolio with σp = 70%?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter2: Risk And Return: Part I
Section: Chapter Questions
Problem 3Q: Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation...
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Problem 3: Suppose the market portfolio has an expected return of 10% and a
standard deviation of returns of 25%. The risk-free rate is 5%. Assume that the
CAPM holds.
a) What is the expected return of a stock that has a beta of 2?
b) If a stock has an expected return of 15% and a standard deviation of
returns of 70%, what fraction of the stock’s variance represents
idiosyncratic risk?
c) What is the expected return of the “best” portfolio that has a standard
deviation of returns of 70%? That is, how high an expected return can
you get if you are willing to hold a portfolio with σp = 70%?
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