Problem 3 (The CAPM) You are presently invested in the Luther Fund, a very broad

Question

Problem 3 (The CAPM)
You are presently invested in the Luther Fund, a very broad-based mutual fund that invests in stocks and other securities. The Luther Fund has an expected return of 14% and a volatility of 20%. Risk-free Treasury Bills are currently offering returns of 4%. You are considering adding a precious metal fund to your current portfolio. The metal fund has a volatility of 30% and a correlation of -20% with the Luther Fund.

(a) The beta of the precious metal fund with the Luther Fund is closest to:

(1) -0.3
(2) -0.6
(3) 0.3
(4) 0.6


(b) The expected return on the previous metal fund is closest to:

(1) -3%
(2) 4%
(3) 1%
(4) 10%


(c) Can a risky stock have an expected return lower than the risk-free rate? Explain.

Explanation / Answer

1. (2)beta = -0.6 2. .2 x 14 = (1) -3% ANSWER 3. Yes, risky stock can have an expected return lower than the risk-free rate as if that is not the case then why will it be called risk free when the risky output is always more. PLEASE RATE

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