CAPM, Portfolio Risk and Return. Consider the following information for three stocks, Stocks X, Y, and Z. The returns on the three stocks are positively vorrelated, but they are not perfectely correlated. (That is, each of the correlation coeeicients is between 0 and 1.
Stock x expected return 9.00%, standard deviation 15% Beta0.8
Stock Y expected return 10.75% standard deviation 15% adn Beta 1.2
Stock Z expected return 12.50% standasrd deviation 15% and Beta 1.6.
Fund Q has one third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium (that is, required returns equal expected returns.)
a. What is the market risk premium?
b. What is the beta of Fund Q?
What is the expected return of Fund Q?
Would you expect the standard deviation of Fund Q to be less than 15%, equal to 15% or greater than 15%? Explain.