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Unformatted text preview: Security Expected Return Standard Dev Correlation with market Beta A .1 .27 .85 B .14 .50 1.5 C .17 .7 .35 Market Portfolio .12 .2 Risk-Free .05 [A] The correlation of the market portfolio with itself is 1,the beat of a market portfolio is 1. [B] The risk free return has a standard deviation of 0, the correlation is 0, the beta is 0. [C] You can solve for the rest of the terms (correlation of A, standard deviation of B, beta of C): Beta = Variance(Return of Market, Return of Individual Stock) / (standard dev of market)^2 Correlation with Market = Variance(Return of Market, Return of individual stock)/[ (standard deviation of market) * (standard deviation of individual stock)] Chapter 11, Problem 30: Does security A’s expected return match up with the CAPM? Use the CAPM formula. Risk free return rate = 0.05, Market Return = 0. 12, Beta = 0.85. The two won't match....
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- Fall '11
- Capital Asset Pricing Model