Question

You have been provided the following data on 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	Correlation*	Beta
Firm A	.104	.35		.81
Firm B	.144		.54	1.36
Firm C	.164	.61	.39
The market portfolio	.12	.20
The risk-free asset	.05

*With the market portfolio.

b-1. According to the CAPM, what is the expected return of Firm A's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return           

b-2. What is your investment recommendation for someone with a well-diversified portfolio?

• Sell

• Buy

b-3. According to the CAPM, what is the expected return of Firm B's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return           

b-4. What is your investment recommendation for someone with a well-diversified portfolio?

• Buy

• Sell

b-5. According to the CAPM, what is the expected return of Firm C's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return           

b-6. What is your investment recommendation for someone with a well-diversified portfolio?

• Buy

• Sell

Answer 1

formula used to complete the table is:

beta = (correlation*standard deviation of security)/standard deviation for market portfolio

we can substitute the known parameters in the above equation and get the unknown parameter