If the correlation coefficient on a stock is perfectly positively correlated, p = +1.0, is diversification working?
If the correlation coefficient on a stock is perfectly positively correlated, p = +1.0, is diversification working? Yes or No ½ point
If the correlation coefficient on a stock is perfectly negatively correlated, p = -1.0, is diversification working? Yes or No ½ point
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Order Paper NowAssume you are the manager of an investment fund worth $25,000,000 which consists of the following five stocks with their beta coefficients.
Stock A $5,000,000 0.5 beta
Stock B $6,000,000 1.0 beta
Stock C $4,000,000 1.4 beta
Stock D $7,000,000 2.0 beta
Stock E $3,000,000 2.5 beta
If the market’s required rate of return is 12%, rm, and the risk free rate, rRF, is 4%, what is this fund’s required rate of return, r. First calculate the fund’s beta below. Then use the SML equation to calculate the fund’s required rate of return, r.
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