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21 December, 21:26

Suppose that Ford's stock volatility (i. e. standard deviation) is 40% while the market volatility is 20%. If the correlation between Ford and the market is 0.8, what is the expected return on Ford's stock? Assume that the expected return on the market is 12% and the risk-free rate is 4%.

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  1. 22 December, 00:35
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    16.8%

    Explanation:

    The computation of expected return on Ford's stock is given below:-

    Beta = correlation * Standard deviation of stock : Standard deviation of Market

    = 0.8 * 40% : 20%

    = 1.60

    Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

    = 4% + 1.60 * (12% - 4%)

    = 4% + 1.60 * (0.12 - 0.04)

    = 4% + 1.60 * 0.08

    = 4% + 0.128

    = 0.04 + 0.128

    = 0.168

    = 16.8%
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