Imagine an economy that is only made of two stocks and a risk-free security, with the following data. Number of Shares Price Expected Return Std Dev. Stock A 100 $1.50 15% 15% Stock B 150 $2.00 12% 9% You also know that the correlation coefficient between Stock A and Stock B is 1/3, and assume the CAPM holds.
Number of Shares Price Expected Return Std Dev.
Stock A 100 $1.50 15% 15%
Stock B 150 $2.00 12% 9%
a. What are the expected return and standard deviation of the market portfolio?
b. What is the beta of Stock A?
c. What is the risk-free rate?
d. What is the expected return of an efficient portfolio that has the same standard deviation as Stock A? What is its beta?