stles Styles Pane You have been provided the following data on the securitiesof
ID: 2618336 • Letter: S
Question
stles Styles Pane You have been provided the following data on the securitiesof three firms, the market portfollo, and the risk-free asset a. Fill in the intermediate calculations and round your answers to 2 missing values in the table. (Leave no cells blank- be certain to enter 0 wherever required. Do not round decimal places, e 32.16) curity Expected 113 153 118 The market portfolio .12 .05 Returnstandard Deviat Ioncorrelation Beta Firm A Firm B Firm C .28 -47 1.44 .32 .69 .20 The risk-free asset With the market portfolio. b-1.According to the CAPM, what is the expected returm of Fim A's stock? (Do not round intermediate calculations. Enter you answer as a percent rounded to 2 decimal places, e.g,32.16) Expected retun b-2. What is your investment recommendation for someone with a well-diversified portfolio? ons Enter your Buy . Sell b-3. According to the CAPM what is the expected retun of Firm B's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g, 32.16) Expected return b-4. What is your investment recommendation for someone with a well-diversified portfolio? .Sell Buy b-5. According to the CAPM, what is the expected retum of Firm C's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, eg, 32.16) Expected return b-6. What is your investment recommendation for someone with a well-diversified portlolio? . Sell Buy h (United States)Explanation / Answer
For someone with well diversified portfolio the relevant risk is measured by beta
According to CAPM
expected return=risk free+(market-risk free)*beta
Expected return of A=5%+(12%-5%)*0.89=11.23%
Buy stock A as 11.3% is more than 11.23%
Expected return of B=5%+(12%-5%)*1.44=15.08%
Buy stock B as 15.3% is more than 15.08%
Beta=correl*standard deviation of stock/standard deviation of market
Expected return of C=5%+(12%-5%)*0.32*0.69/0.20=12.728%
Sell stock C as 11.8% is less than 12.728%
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