Someone who believes that the collection of all stocks satisfies a single-factor model with the market portfolio serving as the factor gives you information on three stocks which make up a portfolio. In addiction, you know that the market portfolio has an expected rate of return of 12% and a standard deviation of 18% The risk-free rate is 5%.
a. What is the portfolio's expected rate of return?
b. Assuming the factor model is accurate, what is the stadard deviation of the rate of return?
For stock A: Beta = 1.1, standard deviation of random error term = 7% and the weight in portfolio = 20%
For stock B: Beta= .80, standard deviation of random error term = 2.3% and the weight in portfoilio = 50%
For stock C: Beta = 1.0, standard deviation of random error term= 1.0% and the weight in portfolio = 30%