2.Stock A has an expected return of 5% and standard deviation of 10%.Stock B has an expected return of 10% and standard deviation of 15%.The correlation between the two stocks' returns is 0.70.If you wanted to form a portfolio of these two stocks and wanted that portfolio to have an expected return of 8%, what weights would you put on each stock?Show your work ("algebra").What would be the standard deviation of this portfolio?(2 marks)

3.You are an investment advisor.You currently own two stocks, A and B, with the following characteristics:

Expected ReturnBeta

X10%0.8

Y16%1.5

The current risk-free rate is 2 percent, and the expected return on the market is 12 percent.

How would you change your holdings of the two stocks (i.e., for each, would you sell or buy more)?Show your calculations (and explain).(4 marks)

Stock A:

Stock B:

4.A stock that currently trades at $10 has a beta of 1.1.The risk-free interest rate for the coming year is 3 percent, and the market price of risk is 7 percent.(4 marks)

(a)What should the expected return on the stock be?

(b)If the stock price is not expected to increase this year (i.e., the stock price is expected to remain unchanged), what dividend payments must investors be expecting for the coming year?

(c)Now assume that dividends over the coming year are expected to be $0.25 per share and the stock price at the end of this year is expected to be $12.Would you recommend the purchase of this stock to your investment clients? [Show your calculations and explain fully.]

5.Chester Corporation's stock is currently paying a dividend of $2 per share.Dividends are expected to grow at a constant rate of 5% and the stock's beta is 1.4. The return on the market is 12%, and the riskfree rate is 6%. The firm is considering a change in strategy which will increase its beta to 1.6. If all else remains unchanged, what would the new constant growth rate in dividends have to be for the firm's stock price to remain unchanged?(4 marks)