1. The = 0.79 for network service provider VeriSign, Inc. (VRSN), and = 1.34 for video game supplier Electronic Arts Inc. (ERTS). If the market return is expected to be 10% and the risk-free rate is 4%, calculate the expected return for both stocks, and for a portfolio with 50% invested in VRSN and 50% invested in ERTS. Also calculate the portfolio beta and the expected return on the portfolio given that beta.

2. The S&P 500 earned an average 13.9% per year with a standard deviation of 15.1%. Based upon these assumptions, and a 4% risk-free rate, suppose an investor created an investment portfolio with 80% invested in the S&P 500 and 20% devoted to Treasury Bills. If the covariance between returns on T-bills and the S&P 500 is zero, calculate the portfolio expected return and standard deviation.

3. Assume health care services provider Gilead Sciences Inc. (GILD) has sensitivity to market returns of 1.5, a small-minus big (SMB) factor sensitivity of 2, and a high minus low book value (HML) factor sensitivity of 1.0. Furthermore, assume a risk-free rate of 3.5%, an average annual equity risk premium of 8.5%, average annual SMB factor return of 2.5%, and an average return to the HML factor of 4.5%. Calculate expected return for GILD assuming a three-factor model intercept of zero.

4. Assume the following information:

Your Portfolio: Expected return 15%, Standard deviation 20%, Beta 1.3

The Market: Expected return 14%, Standard deviation 12%, Beta 1.0

If the risk-free rate is 5%, calculate and compare the Sharpe Ratio and the Treynor Index for both Your Portfolio and The Market. Did your portfolio beat the market on a risk-adjusted basis?

5. Suppose a mutual fund has earned an 11% annual return, the funds = 1.4, the market return RM = 9%, and the risk-free rate RF = 4%. Calculate the mutual funds alpha (MF). On a riskadjusted basis, did the fund beat the market?

6. Suppose a company announces a bid to acquire a smaller rival on a day that macroeconomic news indicated that inflation was picking up. On the day of both announcements, the firms return was 0.55% while the market return was 0.48%. The daily CAPM market model coefficients for the firms are = 0.05 and = 0.8. Using the market model and the marketadjusted model, determine abnormal returns for the firm and thereby assess whether the acquisition announcement represented good or bad news for the firm.