(Answered) If the correlation coefficient on a stock is perfectly

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If the correlation coefficient on a stock is perfectly positively correlated, p = +1.0, is diversification working? Yes or No ½ point

If the correlation coefficient on a stock is perfectly negatively correlated, p = -1.0, is diversification working? Yes or No ½ point

Assume you are the manager of an investment fund worth $25,000,000 which consists of the following five stocks with their beta coefficients.

Stock A $5,000,000 0.5 beta

Stock B $6,000,000 1.0 beta

Stock C $4,000,000 1.4 beta

Stock D $7,000,000 2.0 beta

Stock E $3,000,000 2.5 beta

If the market's required rate of return is 12%, r_m,and the risk free rate, r_RF, is 4%, what is this fund's required rate of return, r. First calculate the fund's beta below. Then use the SML equation to calculate the fund's required rate of return, r.

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