Part II

Question 1: You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .8, -1.3, .95, 1.2 and 1.4. The risk-free return is 3% and the market return is 7%.

1. Compute the beta of the portfolio.
2. Compute the required return of the portfolio.

Question 2: You are given the following probability distribution for a stock:

Probability Outcome

.5 -6%

.5 18%

1. A) Compute the expected return.
2. B) Compute the standard deviation.
3. C) Compute the coefficient of variation.

Part III

Question 1: What is the rationale for the positive correlation between risk and expected return?

Question 2: Why is it possible to eliminate unsystematic risk in a well-diversified portfolio? Likewise, why is it not possible to eliminate systematic risk?

Part II

Question 1: You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .8, -1.3, .95, 1.2 and 1.4. The risk-free return is 3% and the market return is 7%.

1. Compute the beta of the portfolio.
2. Compute the required return of the portfolio.

Question 2: You are given the following probability distribution for a stock:

Probability Outcome

.5 -6%

.5 18%

1. A) Compute the expected return.
2. B) Compute the standard deviation.
3. C) Compute the coefficient of variation.

Part III

Question 1: What is the rationale for the positive correlation between risk and expected return?

Question 2: Why is it possible to eliminate unsystematic risk in a well-diversified portfolio? Likewise, why is it not possible to eliminate systematic risk?