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Let's consolidate what we have learned so far on standard deviation, beta and the Capital...

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Accounting

Let's consolidate what we have learned so far on standard deviation, beta and the Capital Asset Pricing Model (CAPM) and apply our knowledge to solving this problem. Open the attached to see the details of the problem and the requirement

Figures below shows plots of monthly rates of return on three stocks versus the stock market index with Best Fit lines. The beta and standard deviation of each stock is given beside its plot. These plots show monthly rates of return for (a) Ford, (b) Newmont Mining, and (c) McDonalds, plus the market portfolio.

Required:

a) Which stock is riskiest to an undiversified investor who puts all her funds in one of these stocks?

b) Pick any 2 companies. What is the expected rate of return on each stock? Use the capital asset pricing model with an expected market risk premium of 8%. The risk-free rate of interest is 4%.

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