Part 1.

How does a portfolio reduce risk?

Use the following information for Questions 2 and 3.

Securities in vested in the portfolio
Security	Investment amount	b	Expected return	Standard deviation
A	$375	1.2	17%	12%
B	$550	1	15%	8%
AB=0.4

Part 2. (Show all work for credit)

What are the expected return and b of the portfolio?

Part 3. (Show all work for credit)

What is the standard deviation of the portfolio?

Part 4. (Show all work for credit)

Use the following information to calculate the required return on a companys stock. The company has a of 1.2 and the 90-day Treasury Bill rate is 2%. The stock price is $32, next years dividends are expected to be $2.5 per share, and the stock is expected to grow at a rate of 3% annually.