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An asset’s reward-to-risk ratio is defined as its risk premium divided by its standard deviation. It is a useful statistic to summarize the asset’s risk-return trade-off. Consider the following information: Stock A has a reward-to-risk ratio of 0.4 and stock B has a reward-to-risk ratio of 0.33. Stock A’s risk premium is 8%, stock B’s risk premium is 10% and the market risk premium is 7%. The correlation between stocks A and B is 0.6. Assume the CAPM holds. A portfolio consisting of stocks A and B has 20% more systematic risk than the market.

Calculate the total risk of this portfolio.

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92851950

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