Problem #1 you are considering buying 500 shares of gangnam style’s common stock. The common stock is expected to pay a dividend of $4.50 a year from today; the growth rate of the dividends is 4%; the covariance between gangnam style’s return and the marker’s return is expected to be 0.02; the standard deviation of the market’s return is expected to be 0.1. It is also estimated that the return on the tax/sap is 11% and the return on government of Canada t-bills is 6%.

Should you buy the shares if the current market price of gangnam style’s common stock is $35.00?

Problem #2 why are some risks diversifiable and some non-diversifiable? Give an example of each.

Problem #3 a) for each of the stocks listed below, determine which are underpriced, overpriced or correctly priced if the risk-free rate of return is 3.8% and the market risk premium is 8.5%.

b) in an efficient market, what occurs to bring the expected return and required return back into equilibrium? Stock beta expected return a .72 9.6% b 1.04 13.1% c 1.35 14.9% d 1.20 14.0% e 2 po = $25, p1 = $28.46, d1 = $1.50

Problem #4 the total value of your portfolio is $5,000: $3,000 of it is invested in stock y and the remainder invested in the market portfolio. The market portfolio has a beta of 1. The risk premium on the market portfolio is 8%; the risk-free rate is 2%.

Additional information on stocks a and b is provided below. Return in each state probability of state stock y market portfolio excellent 20% 15% 15% normal 50% 5% 25% poor 30% -25% 10%

a. what are the expected returns and standard deviation of returns on stocks y and on the market portfolio?

b. what are the expected return and the standard deviation of your portfolio?

c. if the correlation between stock y and the market portfolio is 0.5, what is the expected/required return on stock y according to the CAPM?

d. what is the beta of your portfolio?