INVESTMENTS AND FUN. ANALYSIS

2) a) We are provided with the following information. We expect that the return of the market portfolio (index) will be 20% in the coming year. The current riskless T-Bil rate is 12%. We also expect that the variance of the market portfolio (index) will be 8% in the coming year. We want to find the expected return of a stock A in the coming year. We know that the covariance between this stock A and the market (index) is 0.14.

a) Given this; what may be the expected return of stock A?

b) What may be the systematic risk of stock A?

b) Suppose that the investor adds a second stock B to his/her portfolio (in addition to A) whose expected return is 16% and invests equal shares in stock A and stock

B. How much this investor may gain from his/her portfolio if the market (index) goes up by 35%?