1. (10 points) Suppose that a firm had a (market) beta of 1.2. What would you expect its price to do if the market rose by 15%? 2. (10 points) If you have a well-diversified portfolio of shares, which stock adds the least risk to your portfolio: one with a beta of 0, or one with a beta of -0.17 3. Here are return details for two stocks: Stock 1 Correlation with M Std deviation of i 1 0.3 0.4 2 0.8 0.3 Elrm] = 0.11; ry = 0.06; var(M) = 0.25 (a) (10 points) Compute betas for stocks 1 and 2. How should these be ranked according to risk? (b) (10 points) What is the expected return for each stock? 4. The following table contains some information about the returns on two securities: Security Std deviation of returns (o;) Correlation btw/ returns and market (pip) ABC 0.2 0.4 XYZ 0.4 0.1 The expected return on the market portfolio is 10% and the standard deviation of its returns is 12%. The risk-free rate of return is 3%. The correlation between ABC and XYZ is 0.35. (a) (15 points) Assuming the Capital Asset Pricing model holds, compute the return which you would expect from each security; (b) (10 points) Which security is the riskier? Why? () (15 points) Suppose that you have $1000 to invest. You create a portfolio by spending $300 on security ABC and $700 on security XYZ. What is the expected return and standard deviation of returns of your portfolio? 5. Suppose for this question that the market portfolio has expected return 12% and standard deviation of returns 20%, and that the risk free interest rate is 3%. Assume that the Capital Asset Pricing Model holds. (a) (10 points) Suppose that a security yields an expected payout of 15 in a year and has a price of 13 today. What is the security's beta? (b) (10 points) Another security has standard deviation of returns 24% and expected return 8%. What is its idiosyncratic risk (expressed as a standard deviation)