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 ?