Capital market

August 9th, 2017

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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

Assume that CAPM holds, and the risk-free rate is 2%.

(a) Find the expected excess return of the market portfolio.

(b) If the market has a Sharpe ratio of 0

5, nd the correlation between the returns

of portfolio B and the market portfolio.

B, and has a covariance of 0

036 with the market portfolio. What is the standard

deviation of stock C?

(d) What should be the expected return of stock C for it to be correctly priced by

CAPM?

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