Standard deviations and correlations, Corporate Finance

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Suppose you are given the expected yearly returns and standard deviations and correlations shown in the tables below:

1765_standard deviations and correlations.png

The market portfolio has an expected return of 18% and a standard deviation of 5%.

Required:

(a) Assuming that 50%, 25% and 25% of funds are invested in T bills, Bonds and Equity respectively,calculate the expected return, variance and standard deviation of your portfolio.

(b) Based on the above information, compute the price of market or systematic risk and explain what it means.

(c) Consider the following equation:

RRRj = Rf + (E(Rm - Rf))βj

What do you understand by the expression E(Rm - Rf) and βj? Illustrate two ways in which the CAPM expression is useful to the financial manager.


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