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What would be the market response

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Reference no: EM132917619

Assume a fictitious world where there are four stocks:

General Electric (GE)

CitiGroup (C)

British Petroleum (BP)

FaceBook (FB).

The market is in equilibrium where CAPM assumptions hold (e.g. homogeneous expectations, efficient markets, zero transaction costs, etc.)

Problem 1: What would be the market's response if the ratio of the contribution to the market's risk premium divided by the contribution to the market's variance is higher for BP and lower for FB vs. the other two stocks?

Reference no: EM132917619

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