Please answer the questions and explains with details. Thank you so much! Proble
ID: 2535129 • Letter: P
Question
Please answer the questions and explains with details. Thank you so much!
Problem 2: True or False (6 points) Are the following statements true or false? Please briefly explain your answer a) (2 points) There are 2 stocks: A and B. Stock B has a smaller standard deviation than stock A. Statement: The variance of a portfolio of stocks A and B must be at least as high as the variance of stock B. b) (2 points) CAPM holds. Statement: If the expected market return increases, but stock A beta and risk-free rate stay constant, then the expected return on stock A must increase.Explanation / Answer
Problem - 2
(a) .............True
Stock - B is having lower standard deviation, hence it is having lower variance ( i.e variance = (sd)2 )
When another stock - A with higher variance is added to the portfolio, the resulting variance of the portfolio should be higher than stock - B variance.
(b) ...........True
Even if Beta remains same and Risk free rate also remains same we have the formula Rf + Beta ( Rm - Rf) where Rm is the market return, if increased, the result of the equation shall surely increase. So expected return on stock - A must increase
(c) ............True
Here Beta is increasing, there will be more than proportionate increase in expected return.