Chapter 9 - x 1 x 2 r p p when = 0 p when = 1 p when = -1...

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Chapter 9 8. a. False – investors demand higher expected rates of return on stocks with more nondiversifiable risk. b. False – a security with a beta of zero will offer the risk-free rate of return. c. False – the beta will be: (1/3 × 0) + (2/3 × 1) = 0.67 d. True. e. True. 9. In the following solution, security one is Wal-Mart and security two is IBM. Then: r 1 = 0.10 σ 1 = 0.198 r 2 = 0.15 σ 2 = 0.297 Further, we know that for a two-security portfolio: r p = x 1 r 1 + x 2 r 2 σ p 2 = x 1 2 σ 1 2 + 2x 1 x 2 σ 1 σ 2 ρ 12 + x 2 2 σ 2 2 Therefore, we have the following results:
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Unformatted text preview: x 1 x 2 r p p when = 0 p when = 1 p when = -1 1.0 0.0 0.100 0.198 0.198 0.198 0.9 0.1 0.105 0.181 0.208 0.149 0.8 0.2 0.110 0.169 0.218 0.099 0.7 0.3 0.115 0.165 0.228 0.050 0.6 0.4 0.120 0.168 0.238 0.000 0.5 0.5 0.125 0.178 0.248 0.050 0.4 0.6 0.130 0.195 0.257 0.099 0.3 0.7 0.135 0.216 0.267 0.149 0.2 0.8 0.140 0.241 0.277 0.198 0.1 0.9 0.145 0.268 0.287 0.248 0.0 1.0 0.150 0.297 0.297 0.297...
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