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Assume you are a fund manager at a large mutual fund, handling the retirement savings of your clients. Based on the risk preferences of your clients, you require that all stocks held must have a Sharpe Ratio of at least 1.3. If the risk-free rate is currently 2%, and you are analyzing a company with an expected standard deviation of returns of 8%, what is the minimum acceptable expected return for this stock based on your requirements? If the market risk premium (calculated as the expected return on the market less the risk free rate) is 7%, and this stock’s Beta is 2.0, does the stock meet your requirements for investment?

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Financial Management, Finance

Category:- Financial Management
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