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Question - Consider the following probability distribution of returns on stock A and the market portfolio. Assume that the CAPM holds and correctly prices all assets. State of Economy Probability Stock A Market Bust 0.3 4% 4% Normal 0.4 13% 10% Boom 0.3 22% 16%
a) If another stock, Stock B, has a beta of 1.2, what is its CAPM expected return?
b) A rational mean-variance optimizing investor under the CAPM seeks a 15% expected return for the investment of her entire wealth. Determine the standard deviation of her (complete) portfolio.
c) Stock C has a beta of 0 and a return standard deviation of 5%. What is the minimum return standard deviation of two-asset portfolios consisting of Stock C and the market portfolio?
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The total risk of a well-diversified portfolio of U.S. stocks appears to be about what proportion of the risk of an average one-stock portfolio?
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