Part 2. Risk and Rates of Return ( 50 points) 1. (10pt) Calculate the expected rate of return ( f ) on each investment alternative. 2. (10pt) One possible measure of risk is the standard deviation of retums (). Calculate the value of each altemative. What type of risk does the standard deviation measure? 3. (10pt) Calculate the coefficient of variation (CV) for the different securities. What type of risk does CV measure? Does the CV measure produce the same risk rankings as the standard deviation? 4. Suppose you created a two-stock portfolio by investing $120,000 in High Tech and $80,000 in Collections. a. (15pt) Calculate the expected return (fp), the standard deviation (p), and the coefficient of variation (CVp) of this portfolio. b. (5pt) How does the riskiness of this two-stock portfolio compare to the riskiness of the individual stocks if they were held in isolation? Explain. 5. (10pt) If you chose to hold a one-stock portfolio and consequently were exposed to more risk than diversified investors, should you expect to be compensated for all your risk? That is, should you earn a risk premium on the part of risk that you could have eliminated by diversifying? 6. The expected rates of return and the beta coefficients of some of the alternatives as supplied by a computer program are as follows: HighTech=1.2;USPubber=0.8;Collections=0.1 a. (4pt) What are the beta(s) for T-Bills and Market Portfolio? b. (6pt) Write out the CAPM equation, use it to calculate the required rate of return on each alternative, and then (roughly) graph the SML. c. (10pt) How do the expected rates of return compare with the required rates of return? Interpret the results. d. (10pt) Does the fact that Collections has a negative beta make any sense? What is the implication of the negative beta? e. (10pt) What would be the market risk and the required rate of return of a 5050 portfolio of High Tech and Collections? Of a 5050 portfolio of High Tech and U.S. Rubber