Expected return of a stock that has a beta of 2

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Suppose the market portfolio has an expected return of 10% and a standard deviation of returns of 25%. The risk-free rate is 5%. Assume that the CAPM holds.

a) What is the expected return of a stock that has a beta of 2?

b) If a stock has an expected return of 15% and a standard deviation of returns of 70%, what fraction of the stock's variance represents idiosyncratic risk?

c) What is the expected return of the "best" portfolio that has a standard deviation of returns of 70%? That is, how high an expected return can you get if you are willing to hold a portfolio with σp = 70%?

Reference no: EM132694651

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