FBE441_Homework_3

FBE441_Homework_3 - USC - MARSHALL SCHOOL OF BUSINESS FBE...

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USC - MARSHALL SCHOOL OF BUSINESS FBE 441 Investments – P. Matos – Spring 2010 Homework Assignment #3 [ due: Monday, March 29 ] 1. Suppose CAPM is true. You are considering investing in an equally weighted portfolio of two stocks, A and B. The betas of these stocks to the market factor are 1.10 and 0.80, respectively. The total return volatilities of stocks A and B are A =0.20 and B =0.18, and the standard deviation of the factor’s return is 0.15. 1.a. What is the beta of your portfolio? 1.b. What is the portfolio’s systematic risk (stated as a variance)? 1.c. What is your portfolio’s total risk (stated as a variance), assuming the idiosyncratic risks of the stocks A and B are uncorrelated? 2. Assume the CAPM holds and refer to the following graph. 2.a. What can we say about the betas of stocks A, B and C? i) All have betas greater than 1 because stocks have more risk than the market (M). ii) Beta of A is below 1, Beta of B is 1 and Beta of C is above 1. iii) Beta of A is below 0, Beta of B is between 0 and 1 and Beta of C is above 1. iv) Cannot tell from the information that is given in the graph.
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This note was uploaded on 10/11/2011 for the course FBE 441 taught by Professor Callahan during the Fall '07 term at USC.

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FBE441_Homework_3 - USC - MARSHALL SCHOOL OF BUSINESS FBE...

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