Considered the following information for three stocks, stocks, XY&Z. The returns on the three stocks are

| January 30, 2017

Question
Considered the following information for three stocks, stocks, XY&Z. The returns on the three stocks are positively correlated , but they are not perfectly correlated.
Stock Expected Return Standard deviation beta
X 9% 15% 0.8
Y 10.75 15 1.2
Z 12.5 15 1.6

Fund Q has one-third of its funds invested in each of the three stocks. The risk-free rate is 5.5%, and the market is in equilibrium.
(a) What is the market risk premium?
(b) What is the beta of Fund Q?
(c) What is the expected return of fund Q?
(d) Would you expect the standard deviation of Fund Q to be less than 15%, equal to 15%, or greater than 15%? Explain.

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