(solution) Over the past 4 years, large-company stocks and U.S. Treasury

(solution) Over the past 4 years, large-company stocks and U.S. Treasury

Over the past 4 years, large-company stocks and U.S. Treasury bills have produced the returns stated below. Given this information,

  1. What are the average rates of return on large-company stocks and Treasury bills?

What are the standard deviation for large-company stocks and Treasury bills?

2. The risk-free rate is 3.5 percent and the expected return on the market is 11 percent. Stock A has a beta of 1.1 and a return of 12 percent. Stock B has a beta of .92 and a return of 10.25 percent. Are these stocks correctly priced? Why or why not?

3. A portfolio is invested 40 percent in stock A, 30 percent in stock B, and 30 percent in stock C. What is the expected return and standard deviation of this portfolio?

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