You have been provided the following data on the securities of three firms and the market: Security E[RI] ?j ?iM ?j Firm A 0.13 .12 ? .90 Firm B 0.16 ? 0.40 1.10 Firm C 0.25 0.24 0.75 ? Market 0.15 0.10 1 1 Risk-free 0.05 0 0 0 Assume the CAPM holds true. a. Fill in the missing values in the table. b. What is your investment recommendation on each asset? Buy or sell? c. Suppose that you are currently holding a portfolio consisting of Firm B only. If you increase your portfolio weight on Firm B by 0.2 (or 20%) and borrow the needed money at the risk-free rate, what will be the new standard deviation of your portfolio?
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To fill in the missing values in the table, we can use the Capital Asset Pricing Model (CAPM) formula: E[Rj] = Rf + Bj * (E[Rm] - Rf) where: E[Rj] is the expected return of security j Rf is the risk-free rate Bj is the beta of security j E[Rm] is the expected Show moreā¦
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