You are given the following data on three securities a b

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You are given the following data on three securities, A, B, and the market, M:

Security	Expected Return (R^-)	Standard Deviation(σ)	Covariance with "M" Cov(R, R_M)
A	10%	15%	225
B	10%	15%	180
M	10%	15%	225

Note: The risk-free rate is R_F = 5%.

a. Compute the correlation between A and the market, and B and the market.

b. Based on your answer to part (a), which of the two securities, A or B, is better to be combined into a portfolio with M? Explain briefly.

c. Compute the expected return and standard deviation for a portfolio formed between M and your choice in part (b). Then compute the weighted-average standard deviation of this portfolio and explain why the portfolio's actual standard deviation is less than just holding any of the three securities, all of which have a standard deviation of 15% and an expected return of 10%.

d. Compute the systematic risk β CAPM expected return for your choice in part (b). Why is it less than 10%? Explain in the context of systematic and total risk.

Reference no: EM13380981

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