Warm up Problems for Topic 4 (CAPM) **These questions are designed to represent elementary principles, and are NOT representative of problems that you will find on any exams. 1. You purchase stock A, which has a covariance with the market portfolio of 40%. The expected return on the market portfolio is 14%, the risk free rate is 6%, and the standard deviation of the market is 50%. 1a) What is the beta of the stock? 1b) What is the risk premium on the market portfolio? 1c) What is the expected return on stock A? 2. You have $1000 to invest. You know that the risk free rate is 6%, and the standard deviation of the market portfolio is 50%. You can invest in the following securities. Stock A Stock B Expected Return ? 12% Variance 25% 36% Covariance (with market portfolio) 12.5% 37.5% Beta 0.5 ? 2a) What is the beta of Stock B? 2b) What is the return on the market portfolio? 2c) What is the expected return on Stock A? 2d)
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