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Otrada [13]
3 years ago
7

The variance of returns of Asset A is 625. The variance of returns of Asset B is 1,225. The covariance of returns between Asset

A and Asset B is 600. The correlation of returns between Asset A and Asset B is closest to:
Business
1 answer:
kodGreya [7K]3 years ago
8 0

Answer:

The correlation of returns between Asset A and Asset B is closest to 0.685714

or 68.57%

Explanation:

The formula to find the correlation of an asset is

Correlation of AB = Co variance AB/Standard deviation A * Standard deviation B

Co variance AB =600

Standard deviation of A= (625)^0.5=25

Standard deviation of B = (1,225)^0.5=35

Put these values in the formula

600/(25*35)=0.685714

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A stock has an expected return of 11.85 percent, its beta is 1.24, and the expected return on the market is 10.2 percent. What m
prisoha [69]

Answer:

The risk free rate is 3.325%

Explanation:

The required rate of return or cost of equity of a stock can be calculated using the CAPM. The CAPM estimates the required rate of return of a stock based on three factors- risk free rate, stock's beta and the market risk premium. The equation of required rate of return under CAPM is,

r = rRF + Beta * (rM - rRF)

Where,

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We already have the values for r, Beta and rM. Plugging in these values in the formula, we calculate the rRF to be,

Let rRF be x.

0.1185 = x + 1.24 * (0.102 - x)

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1.24x - x  =  0.12648 - 0.1185

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