1. The expected rate of return on the market portfolio is 9.25% and the risk–free rate of return is 0.75%. The standard deviation of the market portfolio is 18.50%. What is the representative investor’s average degree of risk aversion?
2. Stock A has a beta of 1.75 and a standard deviation of return of 38%. Stock B has a beta of 4.50 and a standard deviation of return of 79%. Assume that you form a portfolio that is 65% invested in Stock A and 35% invested in Stock B. Using the information in question 1, according to CAPM, what is the expected rate of return on your portfolio?
3. Using the information in questions 1 and 2, what is your best estimate of the correlation between stocks A and B?