Problem: Security A has an expected return of 10.4 percent with a standard deviation of 15 percent, and a correlation with the market of 0.85. Security B has an expected return of 0.73 percent with a standard deviation of 20 percent, and a correlation with the market of 0.67. The standard deviation of rM is 12 percent.
Required to do:
a. To someone who acts in accordance with the CAPM, which security is more risky, A or B? Why?
b. What are the beta coefficients of A and B? (Calculations are required)
c. If the risk-free rate is 6 percent, what is the value of rM?