Question: Assume the CAPM holds. Suppose that the expected return on the market is 7% in 2017 and the standard deviation of market return is 2017 is 12%. Assume that the covariance of Walmart returns with market is 0.00144 and the covariance of Google return with the market is 0.01512. The standard deviations of Walmart and Google stock return are 6% and 20%, respectively. The risk-free rate is 1%.
a) Suppose that you can either invest in Walmart and the risk free treasury bills OR invest in Google and the risk free treasury bills, which company will you choose?
b) What proportion of Google's and Walmart's risk (variance) can be diversified away?