Suppose That the Risk-Free Rate Is 5% and the Market

question 39

Essay

Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Luther Industries has a volatility of 24% and a correlation with the market of .5.If you assume that the CAPM assumptions hold,then what is the expected return on Luther stock?

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Definitions:

Bottom-up Processing

A cognitive approach where perception starts with the smallest or simplest element and works up to the formation of a complete perception or understanding.

Hyperfocus

A state of intense concentration or complete absorption with the task at hand, which can be beneficial for productivity but detrimental if it leads to neglect of other tasks.

Dichromat

A condition where a person has difficulty distinguishing between two colors due to a deficiency in one of the three types of cone cells in the retina.

Trichromat

An individual who has full color vision and can perceive all three primary colors, typically characteristic of normal human vision.