1. What is the price of a share of stock with the following expected dividends? Assume a 10% discount rate. [4 points]

Year 1 2 3 4...

Dividend $1.25 $1.50 $2.00 Growing at 4% per year

2. The last 3 months of returns for stock A are the following: 1 2 3 5% 8% -1%

(a) What is the expected return for next month? [2 points]

(b) What is the standard deviation of the stocks return? [2 points]

(c) If returns are normally distributed with your expected return and standard deviation, what is the range of returns within which you are 95% confidence next months return will fall? [2 points]

3. Assume I construct a portfolio that is 40% stock A from problem 2 and 60% Stock B (Stock B has a standard deviation of 20%, an expected return of 10%, and a correlation with A of 0.3). What is the standard deviation of that portfolio? [5 points]