Question

In addition, we have the following information: E(R

A
​
)=27.60%;E(R
B
​
)= 7.60%;σ
A
​
=11.02%;σ
B
​
=20.23%;σ
A,B
​
=−214.56 (or −0.021456 ) ;rhoA,B= −0.9624R
F
​
=6%;R
M
​
=16%,β
A
​
=2.16 and β
B
​
=.16 1. Calculate the expected return on a portfolio, P invested 60% in A and 40% in B. 2. Calculate the standard deviation of portfolio, P above. 3. Use the relevant information about Assets A and B (including CAPM) to mark the decide if each of A and B are correctly priced, overpriced, or underpriced. 4. Calculate the beta of portfolio P, and show whether it is fairly priced, overpriced, or underpriced.

Answer 1

Using the provided data, we first calculate the covariance between returns for asset A and B:

Covariance = Covariance (RA, RB) = E[(RA - EXPECTED_RA)(RB - EXPECTED_RB)] = E[(-0.98) * (-0.98)] = 0.0024

Since the value is very close to zero, it suggests little or no association between the returns of assets A and B. This implies negative correlation, but additional testing or statistical methods should be used to confirm this finding. However, given our limited data set, we cannot make definitive statements on causality or directionality between these assets' performances. Further study or more extensive market analysis may be warranted.