Need Urgent help to Part-c --- Many Thanks There are two portfolios, A and B. Po

Question

Need Urgent help to Part-c --- Many Thanks

There are two portfolios, A and B. Portfolio A has an average return of 11% per year, and a market beta of 1.5. Portfolio B on the other hand has a Sharpe ratio of 0.3. Assume that CAPM holds, and the risk-free rate is 2%. Find the expected excess return of the market portfolio. If the market has a Sharpe ratio of 0.5, find the correlation between the returns of portfolio B and the market portfolio. Suppose there is an asset C, which is perfectly negatively correlated with asset B, and has a covariance of 0.036 with the market portfolio. What is the standard deviation of stock C? What should be the expected return of stock C for it to be correctly priced by CAPM?

Explanation / Answer

(a)

Thus, expected excess return of the market portfolio is 3%

CAPM holds So, Expected return = Risk free rate+Beta*(market Return-Risk freee return)                                11 = 2+1.5*(Market return-2)                                   6 = Market reurn-2 Market return =                 8 Market return = 8% Average return = 11% Excess return = 3%

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