If the correlation coefficient on a stock is perfectly

Question

If the correlation coefficient on a stock is perfectly positively correlated, p = +1.0, is diversification working? Yes or No ½ point

If the correlation coefficient on a stock is perfectly negatively correlated, p = -1.0, is diversification working? Yes or No ½ point

Assume you are the manager of an investment fund worth $25,000,000 which consists of the following five stocks with their beta coefficients.

Stock A      $5,000,000      0.5 beta

Stock B      $6,000,000      1.0 beta

Stock C     $4,000,000      1.4 beta

Stock D     $7,000,000      2.0 beta

Stock E      $3,000,000      2.5 beta

If the market's required rate of return is 12%, r_m, and the risk free rate, r_RF, is 4%, what is this fund's required rate of return, r. First calculate the fund's beta below. Then use the SML equation to calculate the fund's required rate of return, r.