Accounting assignment numericals: Numericals of characteristics of two securities

1.         Consider the following information about the characteristics of two securities, A and B; the market portfolio, M; and the risk-free rate of return:Security           (Ri, RM)       (Ri)

A                     0.5                   0.4

B                     0.7                   0.8

                        E(RM) = 0.25              (RM) = 0.75             RF = 0.06

(Ri, RM) denotes the correlation between the returns on security i and the returns on the market portfolio; (Ri) denotes the standard deviation of the returns on security i, E(RM) denotes the expected return on the market portfolio; (RM) denotes the standard deviation of the returns on the market portfolio; and RF denotes the risk-free rate of return.

(a)        Calculate i (beta) for each of the following:

            (i)         Security A

            (ii)        Security B

(a)        Use

                        where,

                        (i)         cov(R_A, R_M) = = 0.15

                        (ii)        cov(R_B, R_M) = = 0.42

(b)        According to the Capital Asset Pricing Model (CAPM), what are the expected returns for securities A and B?(b)        Use E(R_i) = R_F + b_i[E(R_M) – R_F]

                                    E(R_A) = 0.06 + .267[0.25- 0.06] = 0.11073

                                    E(R_B) = 0.06 + 0.747[0.25- 0.06] = 0.20193

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