Consider a portfolio consisting of the following three stocks:

Portfolio Weight Volatility Correlation with the Market Portfolio HEC Corp 0.21 13% 0.42 Green Midget 0.31 20% 0.68 Alive And Well 0.48 12% 0.54 The volatility of the market portfolio is 10% and it has an expected return of 8%. The risk-free rate is 3%.

a. Compute the beta and expected return of each stock.

b. Using your answer from part

a, calculate the expected return of the portfolio.

c. What is the beta of the portfolio?

d. Using your answer from part

c, calculate the expected return of the portfolio and verify that it matches your answer to part b.

AppendixLO1