Security a Has an Expected Return of 12

question 20

Essay

Security A has an expected return of 12.4% with a standard deviation of 15%,and a correlation with the market of 0.85.Security B has an expected return of −0.73% with a standard deviation of 20%,and a correlation with the market of −0.67.The standard deviation of r_M is 12%.
a.To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why? (Hint: No calculations are necessary to answer this question; it is easy.)
b.What are the beta coefficients of A and B? Calculations are necessary.
c.If the risk-free rate is 6%, what is the value of r_M?

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Definitions:

1700s

The 1700s, or the 18th century, was a period marked by significant political, cultural, and scientific developments, including the Enlightenment and the start of the Industrial Revolution.

Gini Index

A measure of income inequality. Its value ranges from 0 (which means that every household earns exactly the same amount of money) to 1 (which means that all income is earned by a single household).

Household

A household consists of one or more people who live in the same dwelling and share living accommodations, which could include families, roommates, or individuals living alone.

National Income

The total monetary value of all goods and services produced over a specific time period within a country’s borders, used as an indicator of economic health.