1. Answer the following.

A) Your current portfolio has a value of $30,000, with an expected return of 15%, and a standard deviation of 20%. You decide you want to purchase $6,000 of XYZ, which has an expected return of 13%, a standard deviation of 30%, and is perfectly negatively correlated to your current portfolio. What will be your new portfolios standard deviation after the addition of XYZ?

a) 5.3%

b) 20.6%

c) 11.7%

d) 31.8%

B) As an analyst for Sandhill Inc., you are responsible for many firms, including ADFC. Currently you have a hold recommendation on ADFC. The current price of ADFC is $146. You have conducted an extensive analysis of the industry and you feel that the probability the firm will capture a substantial share of the new market is 25 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a rate of 45 percent per year for the next five years. In that case, the stock price would rise to $226due to the unusually high growth rate of future earnings. However, you feel there is a 40-percent probability that the firm will face serious difficulties in the near future, in which case the stock price will fall to $106, and the earnings growth rate will drop to 3 percent. There is a 35-percent chance that nothing will change for the firm and its earnings growth rate will remain at 12 percent. Calculate the expected price in the future. (Round intermediate calculations to 4 decimal places, e.g. 31.2125 and final answer to 0 decimal places, e.g. 145.)

Expected price

$ ______________

Should you change your recommendation?

(Yes or No)

C) Estimate the beta of the following stock: market risk premium = 25.5 percent, RF = 6.5 percent, P₀= $10.50, expected dividend at the end of the year = $3.00, P₁= $13.00. Assume the market is in equilibrium. (Round intermediate calculations and the final answer to 2 decimal places, e.g. 21.36 or 21.36%.)

Beta

__________________