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Security A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of 0.73% with a standard deviation of 20%, and a correlation with the market of 0.67. The standard deviation of rM is 12%.
a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.)
b. What are the beta coefficients of A and B? Calculations are necessary.
c. If the risk-free rate is 6%, what is the value of rM?
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