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Topic discussion > Quantitative Methods > Expected Return on Stock

Expected Return on Stock

MoneyScience
Sep 10 2019 15:57

Suppose we have the following information on stocks , , and

:

  1. Expected Returns:

,

  • .
  • Standard Deviations:

, ,

  • Pairwise Correlations:

, ,

  1. .

Assume that the CAPM holds and that the market portfolio consists of the above three stocks weighted equally. Find the expected return of Stock Z.

Attempt: We can first get

by using the formula for the variance of a three-asset portfolio. Then, from there, we can solve for the for each stock using . However, I'm not sure how to compute for the correlation between the stock return and the market return.

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