Use the following information to answer the question(s) below.
Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio) : growth stocks and value stocks.Assume that these two portfolios are equal in size (market value) ,the correlation of their returns is equal to 0.6,and the portfolios have the following characteristics: ![Use the following information to answer the question(s) below. Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio) : growth stocks and value stocks.Assume that these two portfolios are equal in size (market value) ,the correlation of their returns is equal to 0.6,and the portfolios have the following characteristics: The risk free rate is 3.5%. -Which of the following equations is INCORRECT? A) E[R<sub>xCML</sub>] = r<sub>f</sub> + x(E[R<sub>Mkt</sub>] + r<sub>f</sub>) B) r<sub>i</sub> = r<sub>f</sub> + b(E[R<sub>Mkt</sub>] - r<sub>f</sub>) C) SD(R<sub>xCML</sub>) = xSD(R<sub>Mkt</sub>) D) E[R<sub>xCML</sub>] = (1 - x) r<sub>f</sub> + xE[R<sub>Mkt</sub>]](https://d2lvgg3v3hfg70.cloudfront.net/TB1626/11ea7cce_3d2f_2b25_928c_e7ce04cce18a_TB1626_00_TB1626_00.jpg)
The risk free rate is 3.5%.
-Which of the following equations is INCORRECT?
A) E[RxCML] = rf + x(E[RMkt] + rf)
B) ri = rf + b(E[RMkt] - rf)
C) SD(RxCML) = xSD(RMkt)
D) E[RxCML] = (1 - x) rf + xE[RMkt]
Correct Answer:
Verified
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