a) The market risk premium needs to be solved for in the following formula:

13.74% = 6% + (Rm - 6%)*1.7

Solving algebraically for Rm, we get 4.55 (using this formula we get the same result when solving for stock Y, but stock X gives us 4.56 rounded to two decimal places. I'm assuming the answer is 4.55 since two of the stocks give this answer)

b) The beta of the fund is the weighted average beta of the fund holdings. Thus the beta is:

1/3*0.7+1/3*1.3+1/3*1.7=1.23

c) The expected return of the fund is the weighted average of the expected returns of the stocks:

1/3*9.19+1/3*11.92+1/3*13.74=11.62

d) The answer is I. less than 16%, since the stocks are not perfectly correlated (ie: the correlation coefficients are less than 1).

Apr 10th, 2015

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