Security a Has an Expected Return of 12

question 25

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 Bσ Whyσ (Hint: No calculations are necessary to answer this question; it is easy.)
b. What are the beta coefficients of A and Bσ Calculations are necessary.
c. If the risk-free rate is 6%, what is the value of rMσ

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Definitions:

Cognitive Factors

Elements that influence the process of thinking, understanding, learning, and remembering.

Karen Horney

A German psychoanalyst known for her theories on neurotic personality development and the concept of basic anxiety.

Relationships

Bonds or connections between individuals, which can be emotional, romantic, professional, or social in nature.

Operant Conditioning

A learning process in which the strength of a behavior is modified by reinforcement or punishment.