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1.Portfolio Expected Return: You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and

1.Portfolio Expected Return: You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and Stock Y with an expected return of 9 percent. If your goal is to create a portfolio with an expected return of 13.30 percent, how much money will you invest in stock X? stock Y?

2.Calculating returns and standard deviations: Based on the following information, calculate the expected return and standard deviation for the two stocks.

State of economy

Probability of state economy

Rate of Return if state occurs Stock A

Rate of Return if state occurs Stock B

Recession

.30

.02

-.20

Normal

.55

.08

.13

Boom

.30

.13

.33

3.Returns and standard deviations: Consider the following:

State of economy

Probability of state economy

Rate of Return if state occurs Stock A

Rate of Return if state occurs Stock B

Rate of Return if state occurs Stock C

Recession

.20

.30

.45

.33

Good

.40

.12

.10

.15

Poor

.30

.01

-.15

-.05

Bust

.10

-.20

-.30

-.09

  1. Your portfolio is invested 40 percent each in A and C and 20 percent in B. what is the expected rate of return of the portfolio?
  2. What is the variance of this portfolio? The standard Deviation?

4.Using CAPM: A stock has a beta of 1.3 and an expected return of 15 percent. A risk free asset currently earns 5.5 percent.

  1. What is the expected return on a portfolio that is equally invested in the two assets?
  2. If a portfolio of the two assets has a beta of .8, what are the portfolio weights?
  3. If a portfolio of the two assets has an expected return of 12 percent, what is its beta?
  4. If a portfolio of the two assets has a beta of 2.60, what are the portfolio weights? How do you interpret the weights for the two assets in this case? explain

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