Reference no: EM13200124
You are given the following data on three securities, A, B, and the market, M:
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Security
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Expected
Return (R-)
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Standard Deviation(σ)
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Covariance with "M" Cov(R, RM)
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|
A
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10%
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15%
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225
|
|
B
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10%
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15%
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180
|
|
M
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10%
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15%
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225
|
Note: The risk-free rate is RF = 5%.
a. Compute the correlation between A and the market, and B and the market.
b. Based on your answer to part (a), which of the two securities, A or B, is better to be combined into a portfolio with M? Explain briefly.
c. Compute the expected return and standard deviation for a portfolio formed between M and your choice in part (b). Then compute the weighted-average standard deviation of this portfolio and explain why the portfolio's actual standard deviation is less than just holding any of the three securities, all of which have a standard deviation of 15% and an expected return of 10%.
d. Compute the systematic risk β CAPM expected return for your choice in part (b). Why is it less than 10%? Explain in the context of systematic and total risk.
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