1. Suppose your portfolio is comprised of 1,000 shares of American Airlines, 1,000 shares of Delta

Airlines, and 1,000 shares of United Airlines. The beta for American is 3.85, for, Delta it is 1.33,

and for United it is 1.71. The stock price for American is $42, for Delta is $44.50, and for United

is $56. Find the beta of your portfolio.

2. You are analyzing a stock that has a beta of 1.2. The risk free rate is 5% and you estimate the

market risk premium to be 6%. If you are absolutely sure the stock will have a return of 11% over

the next year, should you buy or sell the stock?

3. Suppose you expect the stock market will do very well next year. Would you rather own stocks

with high beta or low beta?

4. Suppose your investment portfolio is comprised of the Russell 1000 Index ETFthis index

represents the 1000 largest publicly traded firms in the U.S.with ticker IWF. You are thinking of

buying one (and only one) of the following assets: stock of Tesla (ticker TSLA), stock of Best Buy

(BBY), or a Treasury Bonds ETF (IEF). Your new portfolio will be comprised of 90% IWF with

the rest in the asset you buy.

Below are average returns, standard deviations, and correlations based on monthly returns for the

past five years. Would you buy one of the three assets? If so, which asset would you buy? Explain.

(Note: think in terms of the Sharpe ratio).

Expected Return Standard Deviation Correlations IWF TSLA BBY IEF 1 .375% 1.692% 1.988% 0.206% 3.004% 12.170% 9.352% 1.458% 1.00 0.27 1.00 0.25 0.03 1.00 -0.18 -0.03-0.31 1.00