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Correlation coefficient on a stock

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If the correlation coefficient on a stock is perfectly positively correlated, p = +1.0, is diversification working? Yes or No ½ point

If the correlation coefficient on a stock is perfectly negatively correlated, p = -1.0, is diversification working? Yes or No ½ point

Assume you are the manager of an investment fund worth $25,000,000 which consists of the following five stocks with their beta coefficients.

Stock A      $5,000,000      0.5 beta

Stock B      $6,000,000      1.0 beta

Stock C     $4,000,000      1.4 beta

Stock D     $7,000,000      2.0 beta

Stock E      $3,000,000      2.5 beta

If the market's required rate of return is 12%, rm, and the risk free rate, rRF, is 4%, what is this fund's required rate of return, r. First calculate the fund's beta below. Then use the SML equation to calculate the fund's required rate of return, r.

Reference no: EM131954627

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