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The market price of a security is $50. Its expected rate of return is 14%. The risk-free rate is 6%, and the market risk premium is 8.5%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)

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okpalawalter8

The market price of a security is $50. Its expected rate of return is 14%, and the market price of the security  is mathematically given as

MR=27.368

What will be the market price of the security if its correlation coefficient with the market portfolio doubles?

Generally, the equation for expected rate return is mathematically given as

RR=(Rf+beta*(Rm-Rf)

Therefore

RR=(Rf+beta*(Rm-Rf)

Beta= (13-7)/8

Beta=0.75

In conclusion, the market price of a security

MR=DPs/RR

Where

Po=DPS/RR'

DPS=40*0.13

DPS=$5.23

and

RR=&+1.5*8

RR=19%

Hence

MR=$5.23/0.19

MR=27.368

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