Conglomerated Industries has 4 divisions, each worth about one-quarter of the firm’s market value. The following chart summarizes the possible returns on the divisions as well as on the market portfolio.
a. Calculate the expected rate of return and standard deviation of return for each division, the firm, and the market.
b. What is the beta of the divisions, the firm, and the market?
c. According to the CAPM, what rate of return do investors require for each division, if the risk-free rate is 4% and the expected rate of return for the market is as calculated in (a)?
d. If the company was thinking of selling the underperforming divisions, which one(s) should it consider selling? Explain your answer.