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7) Assume a fictitious world where there are four stocks: General Electric (GE) CitiGroup...

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Accounting

7) Assume a fictitious world where there are four stocks:

General Electric (GE)

CitiGroup (C)

British Petroleum (BP)

FaceBook (FB).

The market is in equilibrium where CAPM assumptions hold (e.g. homogeneous expectations, efficient markets, zero transaction costs, etc.)

What would be the markets response if the ratio of the contribution to the markets risk premium divided by the contribution to the markets variance is higher for BP and lower for FB vs. the other two stocks? (15 pts)

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