a. Stock A has a standard deviation of 50% and an expected return of 20%. Stock B has a standard deviation of 35% and an expected return of 15%. The correlation between the returns on the two stocks is 0.75. Consider a portfolio with a weight of on Stock A and on Stock B.

i. What is the standard deviation of the portfolio?

ii. What is the expected return of the portfolio?

b. In 2019, Firm X had revenues of $200 million, costs excluding depreciation of $70 million, depreciation expenses of $20 million, interest expenses of $40 million and capital expenditures of $15 million. Net working capital was $35 million at the end of 2018 and $25 million at the end of 2019. The corporate tax rate is 20%. What was the firms unlevered cash flow in 2019?

c. Firm Ys debt consists of BB-rated bonds with a promised yield to maturity of 8.42%, a probability of default of 2.2% and an expected loss in default of 60%. What is the firms debt cost of capital?

d. You have the following information about the S&P500 index:

• Expected dividend yield for the next year (): 2.7%
• Expected perpetual dividend growth rate: 3.5%.

The S&P500 index is a proxy for the market portfolio, so we assume that the return on the market portfolio is equal to the return on the S&P500.

What is the expected return on the market portfolio implied by the Gordon model?