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Imagine an economy that is only made of two stocks and a risk-free security, with the following data.
Number of Shares Share Price Expected Return Standard Deviation
Stock A 100 $1.50 15% 15%
Stock B 150 $2.00 12% 9%
You also know that the correlation coefficient between Stock A and Stock B is 1/3, and assume the CAPM holds.
a) What are the expected return and standard deviation of the market portfolio?
b) What is the beta of Stock A?
c) What is the risk-free rate?
d) What is the expected return of an efficient portfolio that has the same standard deviation as Stock A? What is its beta?
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What is the value of a bond that has a par value of $1,000, a coupon rate of 17.24% (paid annually) and matures in 8 years? Assume a required rate of return on this bond is 13.53%.
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