In: Finance
Andrew invested $10,000 in Share X and $40,000 in Share Y. The expected returns and variances of returns on X and Y, and the correlation between their returns are given below.
X Y
EXP RETURN (X)= 00.11
Expected return (Y)= 0.20
VARIANCE (X)= 0.0324 (Y) 0.0576
CORRELATION 0.6
(i) Find the expected return and standard deviation for Andrew’s portfolio. (ii) Assume that the risk-free rate of return is 5% and share Y has the same expected return and risk as the market portfolio. Calculate the beta for Share X and determine if Share X is correctly priced according to the capital asset pricing model (CAPM). (iii) According to CAPM, what will happen to the price of Share X if the rate of inflation is expected to fall by 2 percentage points?