Problem 4 Suppose you are able to find a German stock with a beta of -0.30 (minus 0.30) against the German market index (DAX). a. How would you expect this stock's price to change if the DAX suddenly increases by 5 percent? What if the DAX falls by 5 percent? (For this part assume the time horizon is very short so the risk-free rate is close to zero.) b. You hold a well diversified portfolio of German stocks worth 30,000. You are about to invest an additional 30,000. Which of the following additional investments gives you the safest return: i. Invest 30,000 in the DAX index? ii. Invest 30,000 in risk-free, short-term German government debt? 2 iii. Invest 30,000 in a stock with B = -0.30 and very little unique (stock- specific) risk? c. German stocks with B = +0.30 offer expected returns of 6.4 percent. The risk-free rate is 4 percent. What must the expected return be on the stock with B = -0.30