1) The common stock of Marielle Machinery will generate the following payoffs to investors next year:

	Dividend	Stock Price
Boom	$8	$240
Normal	4	90
Recession	0	0

The common stock of Escapist Films will generate the following payoffs to investors next year:

	Dividend	Stock Price
Boom	$0	$18
Normal	1	26
Recession	3	34

Marielle Machinery and Escapist Films stocks are selling today for $90 and $30 a share, respectively. Calculate the expected rate of return and standard deviation of returns for both companies. Then calculate the expected return and standard deviation of a portfolio half invested in Marielle Machinery and half invested in Escapist Films.

2) A share of stock with a beta of 0.80 now sells for $42. Investors expect the stock to pay a year-end dividend of $1.5. The T-bill rate is 3% and the market risk premium is 8%. Suppose investors actually believe that the stock will sell for $45 at year-end. Is the stock a good or bad buy? What will investors do?

3) ) A share of stock with a beta of 0.80 now sells for $42. Investors expect the stock to pay a year-end dividend of $1.5. The T-bill rate is 3% and the market risk premium is 8%. Suppose investors actually believe that the stock will sell for $45 at year-end. Is the stock a good or bad buy? What will investors do?

(Hint: Look back to the auto and gold example in the lecture slides)

4) A share of stock with a beta of 0.80 now sells for $42. Investors expect the stock to pay a year-end dividend of $1.5. The T-bill rate is 3% and the market risk premium is 8%. Suppose investors actually believe that the stock will sell for $45 at year-end. Is the stock a good or bad buy? What will investors do?