Answer with excel or handwritten. You are thinking about acquiring two entertainment company stocks, Walt Disney and Carnival Corp. Some preliminary statistical analysis suggests that Disney stock has had an annualized standard deviation of 20%, Carnival an annualized standard deviation of 30%, and that the correlation coefficient between the two of them has been 0.7. Over that same period, the market portfolio has had an annual standard deviation of 16%. You estimate Disneys equity beta to be 1.2 and Carnivals to be 0.75. The current yield on long-term Treasury bonds is 3% and you estimate that the expected return on the market portfolio is 9.5%.

a. What is your estimate of the expected returns on Disney and Carnival stock?

b. You are considering a portfolio of the two stocks with 65% invested in Disney and the other 35% invested in Carnival. What would be the expected return and standard deviation of such a portfolio?

c. You are also thinking about adding some Treasury bonds to your portfolio. If you allocated 25% of your overall portfolio to Treasury bonds, with the remaining 75% invested in the risky portfolio derived above (with 65% Disney stock and 35% Carnival stock), what do you estimate to be the standard deviation and expected return of your overall portfolio?

d. Alternatively, you could construct a portfolio by allocating your money between Treasury bonds and the market portfolio. What portfolio allocation between these assets would generate the same overall portfolio expected return as estimated in part (c)? What would be the standard deviation of such a portfolio?