d) Suppose that we have a risky portfolio, P, and we denote the ACTUAL risky Rate of Return by r_P, the Expected Rate of Return on P by E(r_P), its Standard Deviation by _P and Risk Free Rate by r_f. Suppose further E(r_P) = 15%, _P = 22%, and r_f = 7%. What are the Expected Rate of Return, Risk Premium, Standard Deviation, and Ratio of Risk Premium to Standard Deviation for a complete portfolio with Y = .75

a) CEMENCO Stock Return

YEAR CEMENCO RETURN

2000 13.9%

2001 20.0%

2002 11.6%

2003 2.8%

2004 3.6%

2005 -16.3%

2006 47.3%

2007 -12.7%

Find the Average Return and Risk (as measured by Standard Deviation) of CEMENCO since 2000.

b) You have a portfolio consisting of 20 percent CEMENCO stock ( = 0.81), 40 percent of Monrovia Breweries (Club Beer) stock (To the extent that these averages approximated investor expectations for the period, what must have been the average coefficient of risk aversion? Formula: E (r_m) r_f = ²_m

If the coefficient of risk aversion were actually 3.5, what risk premium would have been consistent with the markets historical standard deviation?

d)A portfolios return is 12%, its standard deviation is 20% and the risk-free rate is 4%. Which of the following would make the greatest increase in the portfolios Sharpe ratio?

An increase of 1% in expected return?

A decrease of 1% in the risk-free rate?

A decrease of 1% in its standard deviation?