G$3$ LG$4$ ST$8-1$ Portfolio analysis You have been asked for your advice in selecting a portfolio of

assets and have been given the following data:

You have been told that you can create two portfolios$-$one consisting of assets A

and $B$ and the other consisting of assets A and $C-$by investing equal proportions

$(50\%)$ in each of the two component assets.

a$.$ What is the expected $($average$)$ return for each asset over the three$-$year period?

b$.$ What is the standard deviation for each asset's return?

c$.$ What is the expected $($average$)$ return for each of the two portfolios?

d$.$ How would you characterize the correlations of returns of the two assets making

up each of the two portfolios identified in part c$?$

e$.$ What is the standard deviation for each portfolio?

f$.$ Which portfolio do you recommend? Why?

ST$8-2$ Beta and CAPM A certain stock has a beta, $,$ of $1\mathrm{.}50.$ At this time, the risk$-$free

rate, $R_F$ is $3\%,$ and the expected return on the market portfolio, $r_m,$ is $10\%.$ You

believe this stock will earn an $11\%$ return next year.

a$.$ If the return on the market portfolio were to increase by $10\%,$ what would you

expect to happen to the stock's return? What if the market return were to decline

by $10\%?$

b$.$ Use the capital asset pricing model $($CAPM$)$ to find the required return on this

stock.

c$.$ Given your answer to part b$,$ would you recommend this stock? Why or why not?

d$.$ Assume that as a result of investors becoming less risk averse, the market return

drops to $7\%,$ but the risk$-$free rate remains at $3\%.$ What effect would this change

have on your responses in parts b and $c?$