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Suppose you group all the stocks in the world into mutually exclusive portfolios (each stock is in only one portfolio): growth stocks and value stocks. Suppose the two portfolios have equal size? (in terms of total? value), a correlation of 0.5, and the following characteristics . The risk free-rate is 3%.

a. What is the (1) expected return and (2) volatility of the market portfolio? (which is a 50-50 combination of the two? portfolios)?

b. Calculate the Sharpe ratios of the value stock, growth stock, and market portfolio.

c. Does the CAPM hold in this economy?

(Hint?: Is the market portfolio efficient?)

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92846146

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