Expected Return on Stock
MoneyScience Sep 10 2019 16:57 
Suppose we have the following information on stocks X, Y, and Z
:
 Expected Returns: E(RX)=10%
, E(RY)=12%
 .
 Standard Deviations: σX=10%
, σY=15%, σZ=10%
 Pairwise Correlations: ρXY=0
, ρXZ=0, ρYZ=0.5
 .
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 σM
by using the formula for the variance of a threeasset portfolio. Then, from there, we can solve for the β for each stock using β=Cov(Ri,RM)σ2M. However, I'm not sure how to compute for the correlation between the stock return and the market return.
