1. Over the next year, you believe that the stock market may boom with a 30% probability, stay on a normal course with a 40% probability, or go bust with a 30% probability. Suppose that the excess stock market retum that would be realized is 50% in the boom state, 20% in the normal state, and 40% in the bust state. Compute the expected reward-to-volatility ratio for a stock market investment 2. Suppose there are two possible states for the economy over the next year, boom or bust, and these two states are equally likely to occur. An asset you may invest in has a payoff forecast of t160 million in the boom state and 64 million in the bust state. The risk-free rate is 20% and a risk premium of 20% is required for assets with similar risk features. What is the maximum price you would agree to pay for this asset today? 3. You want to form a portfolio that has an expected annual return of 18% by investing in a stock fund and a bond fund. The stock fund has an expected annual return of 15% and an annual standard deviation of 40%. The bond fund, on the other hand, has an expected annual return of 10% and a standard deviation of 15%. The correlation between the annual returns of these two funds is estimated at 0.50. What would be the conditional standard deviation around your portfolio's expected return? 4. You want to create a 100,000 portfolio comprised of stocks A and B given below. What are the weights that should be assigned to these stocks to construct the portfolio with the lowest possible return variance? Stock A Stock B Expected Return 10% Standard Deviation 15% Correlation 10% -1 5. The following data is given about stocks A, B, and C. You have a portfolio with an expected return of 15%. What is the standard deviation of the portfolio if 30% of the total investment is in Stock C? Retum and Risk Return Correlations Stock Eft) oft) A B A 25% 50% 1.00 0.40 -0.20 B C 15% 5% 40% 30% 0.40 0.20 1.00 0.50 -0.50 1.00