Compute the expected return and volatility of portfolios

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1) Assume the T-Bill rate is 4% and the equity premium for the S&P 500 is 5%. The standard deviation of the S&P 500 return is 25%.

i) Compute the expected return and volatility of portfolios with a 0% to 100%allocation in the S&P 500 (increments of 10%).

ii) What is an investor's expected return if the maximum standard deviation they find acceptable is 15%?

2) The risk-free rate is 6% and the market's expected return is 10%. According to CAPM, what is the beta of a stock whose expected return is 12%?

3) We know that the market responds positively to good news and that good news regarding the economy is predictable. Why then can we not necessarily predict stock returns based on economic forecasts?

Reference no: EM132831074

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