Question 3 The following table shows some estimates of the risk of stock A, stock B, and the AEX. The listed volatility is the standard deviation of the asset return over next year. Assume CAPM theory holds with AEX as market portfolio. CP(euro) Vol. Corr Beta Exp return with AEX Stock A 15 0.2 0.4 10% Stock B 7.5 60% 20% AEX 333 30% 16%
a. Complete the table, i.e, reconstruct the 5 figures that are not given in the table.
b. Determine a portfolio (pf) in stock A and B with the same level of systematic risk as in the AEX. What is the unique variance of pf, assuming that the correlation between returns of stock A and B is 0.3? Is pf efficient?
c. What is the certainty equivalent of selling stock B at the end of the year?