If you use CAPM the expected return r will be
r = 0.06 + 1.2*(0.12-0.06) = 0.06 + 0.072 = 0.132 i.e. 13.2%
This is my first time using this forum. It looks nice though. I hope I get some help with these questions, they have kept me up all night.
#1. A highly risk-averse investor is considering the addition of an asset to a 10 stock portfolio. The two securities under consideration both have an expected return equal to 15%. However, the distribution of possible returns associated with Asset A has a standard deviation of 12%, while Asset B's standard deviation is 8%. Both assets are correlated with the market with r equal to 0.75. Which asset should the risk-averse investor add to their portfolio?
#2 The risk-free rate of interest is 6%. The overall stock market has an expected return of 12%. Hazlett, Inc. has a beta of 1.2. What is the required return of Hazlett, Inc. stock?
#3 Calculate the required rate of return for Mercury, Inc., assuming that investors expect a 5% rate of inflation in the future. The real risk-free rate is equal to 3% and the market risk premium is 5%. Mercury has a beta of 2.0, and its realized rate of return has averaged 15% over the last 5 years.
Sorry for putting 3 questions, but I have been trying to help my son with his studying and I have not been able to solve these. It has been a long time since I have taken these classes.
Any help would be greatly appreciated!