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?