Compute the correlation between assets a and b

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There are three assets, A, B and C, where A is the market portfolio and C is the risk-free asset. The expected return on the market portfolio is 12% and the standard deviation is 20%. The risk-free asset yields 4%. The return on Asset B has standard deviation 40% and market beta of 1. Assume that the CAPM holds.

Problem (a) Compute the expected return of asset B and its covariances with assets A and C. Compute the correlation between assets A and B.

Problem (b) Consider a portfolio of assets A and B, with weight w on asset A and 1 - w on asset B. Compute the expected return and standard deviation of the portfolio in the three cases w = 0, w = 1/2 and w = 1.

Reference no: EM132761887

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