Equity Researchers have estimated the rate of returns for Stock A, Stock B and Market Portfolio under each state of the economy is as under: Economy…
CA Final · Advanced Financial Management · PYQS · May 2025
Equity Researchers have estimated the rate of returns for Stock A, Stock B and Market Portfolio under each state of the economy is as under: Economy Probability Return on Stock A (%) Return on Stock B (%) Market Portfolio (%) Boom 0.3 16 19 18 Normal 0.4 14 16 15 Recession 0.3 -9 -7 -8 The risk-free rate of return is expected to be 8%. The covariance between Stock A and the Market Portfolio is 122.70, while the covariance between Stock B and the Market Portfolio is 125.40. Assume that the CAPM framework is valid in this market. From the information given above, choose the correct answer to the question No. 1 to 5.
Suggested Answer and Working Notes:
Correct Answer: Option (C)
(C) 7.70% and 10%
Topics: Portfolio Management
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