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Consider the following information for Stocks A, B, and C. The returns on the three stocks, while positively correlated, are not perfectly correlated.
The risk-free rate is 4.50%.
| Stock | Expected Return | Standard Deviation | Beta |
| A | 9.30% | 20% | 1.2 |
| B | 11.70% | 20% | 1.8 |
| C | 12.90% | 20% | 2.1 |
Using SML equation, you can solve for the market risk premium which, in this case, equals approximately _____________________ .
The beta for Fund P is approximately _____ .
Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock.
This information implies that the required rate of return for Fund P is approximately _______________ .
Which of the following is the reason why the standard deviation for Fund P is less than 20%?
Any two stocks in Fund P have a correlation coefficient of 1.
The stocks in Fund P are not perfectly correlated.
The stocks in Fund P are perfectly correlated.
The stocks in Fund P each have differing standard deviations.
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