Consider the following information associated with Stock A and Stock B given in the following table. Stock A Stock B Average rate of return 12% 18%…
BBS Fundamentals of Financial Management · 2077 · Solved Question with Answer
Consider the following information associated with Stock A and Stock B given in the following table.
| Stock A | Stock B | |
| Average rate of return | 12% | 18% |
| Standard deviation of returns | 6% | 8% |
| Covariance of stock returns | -38.4 | |
| Coffecient of correlation of stock returns | -0.8 |
a. Which one stock is more risky? Which one stock would you prefer?
b. If you form a portfolio of Stock A and Stock B comprising 60 percent wealth in Stock A and the rest of Stock B, calculate the risk and return of your portfolio.
c. Assume risk-free rate and market return are 8% and 15% respectively. Covariance between Stock A and the market return is 54 and the variance of market return is 36, calculate the beta of Stock A. What is the required rate of return on Stock A?