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Assume the CAPM holds and consider stock X, which has a return variance of 0.09...

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Finance

Assume the CAPM holds and consider stock X, which has a return variance of 0.09 and a correlation of 0.75 with the market portfolio. The market portfolio's Sharpe ratio is 0.30 and the the risk-free rate is 5%.

(a) What is Stock X's expected return?

(b) What proportion of Stock X's return volatility (i.e. standard deviation) is priced by the market? Explain why this number is less than 1.

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