1.Your friend is in the business of flipping apartments in New York. He tells you that in two years the price of a condominium near Central park will be $5,000,000. Assume that he is correct. He also tells you that its current price is $4,000,000. Current two year risk free rate is 2%. You estimate that the risk premium for such an investment is 9%. What will you do? Show all calculations. Suppose you buy this apartment for $4,000,000. After one year you estimate that the risk premium is now 24%. What happens to the price of the apartment? After one year have made money on your investment or lost money on your investment? How much?After one year if the risk premium is 24% but the risk free rate is 0% (Fed cuts rates aggressively) what happens to the value of the apartment?

2.Your friend is in the business of flipping apartments in New York. He tells you that in two years the price of a condominium near Central park will be $5,000,000. Assume that he is correct. He also tells you that its current price is $4,000,000. Current two year risk free rate is 2%. You estimate that the risk premium for such an investment is 7%. What will you do? What if you made a mistake in estimating the risk premium and the actual risk premium is 10%? Will you make money or lose money? Show all calculations. What if you made a mistake in estimating risk premium and the actual risk premium is 5%. Will you make money or lose money? Show all calculations.

1. You have the following information about three beer stocks. Which one will you buy and why? Show all calculations Stocks Current Expected Economic State Probability of Price after Price Dividend after 1 year Economic State 1 year Good 30% 105 Bier Machen Werken (BMW) 95 2 Average 10% 95 Bad 30% 30 Good 0% 125 Yo Bro Craft Beer 115 3 (YOB) Average 10% 115 Bad 30% 80 Good 0% 130 Make Alcohol Great Again (MAGA) 125 5 Average 40% 125 Bad 30% 135 2. Given the above information, which stock according to you should have the lowest risk premium and why? Explain. 3. You have the following information about three beer stocks. Which one would you buy and why? Show all calculations. Stocks Year Return 2015 5% 2016 6% Bier Machen Werken (BMW) 2017 7% 2018 -15% 2015 20% Yo Bro Craft Beer (YoB) 2016 30% 2017 -50% 2018 10% 2015 2% Make Alcohol Great Again 2016 3% (MAGA) 2017 2% 2018 1% 3. What is systematic risk? Give an example. 4. What is idiosyncratic risk? Give an example. 5. What is risk premium? 6. The covariance of a stock with the market is 0.5. The variance of the market is 0.4. What is the beta of the stock? Show all calculations. 7. The risk free rate is 2%. The expected return of the market is 8%. The beta of a stock is 1.5. What is the expected return of the stock? Show all calculations. You undertake and estimation exercise and realize that the actual beta of the stock should be 1.8. How will the stock price change when the market realizes that the actual beta of the stock is 1.8 and not 1.5? 8. In the previous example, suppose the Fed cuts rates 0.5% and the risk free rate is 1.5% now. How do you think will the stock price react to this rate cut? Why? 9. Suppose the following five stocks comprise of your portfolio. What is the expected return of your portfolio? Value of Stock Expected Stock in USD) Return A 100000 5% B 200000 6% 50000 10% D 75000 -5% 25000 20% 1000000 7% 1. Your portfolio is worth $1,000,000. You have two stocks in this portfolio. You have $300,000 worth of stock A and $700,000 worth of stock B. Stock A has variance of 0.2 and stock B has variance of 0.4. The covariance between stock A and Stock B is 0.4. What is the variance of your portfolio? What is the standard deviation of your portfolio? Show all calculations. What if the covariance between Stock A and Stock B changes to - 0.4? Does the risk of your portfolio increase or decrease? Show all calculations. 2. What is the efficient frontier? Suppose your portfolio lies on the efficient frontier. Your broker recommends that you add Tesla to your portfolio. He believes that it will increase the expected return of your portfolio significantly. You estimate add Tesla to your portfolio will increase the expected return of your portfolio but it will no longer lie on the efficient frontier. Should you add Tesla or not? Explain pointedly and logically