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d. How would you characterize the correlation of returns of the two
stocks L and M?
e. Discuss any benefits of diversification achieved by Jamie through
creation of the portfolio.
P8–24 Capital asset pricing model (CAPM) For each of the cases
shown in the following table, use the capital asset pricing model to
find the required return.
Case Risk-free rate, RF Market return, rm Beta,β
A 5% 8% 1.30
B 8 13 0.90
C 9 12 −0.20
D 10 15 1.00
E 6 10 0.60
P8–25 Beta coefficients and the capital asset pricing model Katherine
Wilson is wondering how much risk she must undertake to generate
an acceptable return on her portfolio. The risk-free return currently is
5%. The return on the overall stock market is 16%. Use the CAPM to
calculate how high the beta coefficient of Katherine’s portfolio would
have to be to achieve each of the following expected portfolio returns.
a. 10%
b. 15%
c. 18%
d. 20%
e. Katherine is risk averse. What is the highest return she can expect if
she is unwilling to take more than an average risk?