Answers
Solution:
a)Calculation of market risk premium:
We can calculate the market risk premium using CAPM.As per CAPM,
Expected return=Risk free rate+Beta*Market risk premium
Using value of stock A,market risk premium is;
9.02%=5.5%+0.8*Market risk premium
Market risk premium=3.52/0.8=4.40%
b)Calculation of Beta of fund P
Beta of fund P=Beta of stock*weight of stock
=0.8*1/3+1.1*1/3+1.6*1/3
=1.17
c)Calculation for expected return of fund P
Expected return of fund P=Expected return of stock*weight
=9.02*1/3+10.34*1/3+12.54*1/3
=10.63%
d)Since the market is in equilibrium,hence the standard deviation of fund P shall be equal to 14%
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