Amanda Corporation. is interested in the tradeoff between investing in two stocks, ABC and DEF. The expected return on ABC is 6 percent and on DEF is 18 percent.

1. Graph the relationship between expected return on the portfolio and the weight in DEF.

Weight in DEF	Portfolio return
0%	6%
1%	6.12%
2%	6.24%
3%	6.36%
99%	17.88%
100%	18%

1. What is the tradeoff between investing in ABC and DEF (i.e., if we increase the weight in DEF by 1%, what is the change in the expected return on the portfolio)?
2. Your boss has just looked at your results and disagrees. He says the tradeoff between DEF and ABC is negative and, therefore, your results are wrong. Explain to your boss how you are both correct.

Question 2

Obtain monthly for Magna International Inc., the Bank of Montreal, and the S&P/TSX Composite Index for January 1, 2017 to December 31, 2021.(Note: monthly historical prices, adjusted for dividends, are available from http://ca.finance.yahoo.com.) To obtain the data, go to the website and search using the following ticker symbols:

MG.TO

BMO.TO

^GSPTSE

1. Which firm do you expect to have a larger beta? Explain your reasoning.
2. Calculate the beta for each company.
3. Create a portfolio consisting of 50 percent in Magna International and 50 percent in Bank of Montreal.
4. Calculate the monthly returns for the portfolio and calculate the beta of the portfolio using those monthly returns.
5. Using equation 11.8, calculate the beta of the portfolio.
6. Compare the two betas.