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Well talk a lot more about these incentive issues

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Unformatted text preview: lders. We’ll talk a lot more about these incentive issues when we study capital structure and corporate governance in more detail towards the end of the course. 3. a) E(r stocks) = 0.3(-11%) + 0.4(13%) + 0.3(27%) = 10% Stdev(r stocks) = [0.3(-11%-10%)² + 0.4(13%-10%)² + 0.3(27%-10%)²]0.5 = 15% E(r bonds) = 6% Stdev(r bonds) = 7.75% b) Cov(r stocks, r bonds) = 0.3(-11%-10%)(16%-6%) + 0.4(13%-10%)(6%-6%) + 0.3(27%-10%)(-4%-6%) = -0.011 Correlation = -0.011/ (0.15 * 0.0775) = -0.95 c) E(r equal-...
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This document was uploaded on 02/27/2014 for the course ECON 1745 at Harvard.

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