0. Refer to the data in Exhibit 3.12 to answer the following questions.

   1. What are the beta coefficients of the five stocks?

   2. Whatarethecovariancesandthecorrelationcoefficientsofthefivestocksreturns

      with those of the market portfolio?

   3. Show that the correlation coefficient between the returns of stock A and stock B

      is equal to the product of their respective correlations with the market. Calculate

      the correlation coefficient between the returns of stock A and stock B.

   4. What is the beta of an equally-weighted portfolio of the five stocks? Compare it

      to the beta of the market portfolio.

EXHIBIT 3.12 THE CHARACTERISTICS OF THE MARKET PORTFOLIO. THE MARKET PORTFOLIO CONTAINS ALL ASSETS IN PROPORTION TO THEIR MARKET VALUE Market Carco Portfolio Atco $10 9,000 Bilco $30 2,000 $18 5,000 Delco $20 7,000 Enco $24 5,000 $90,000 $60,000 $90,000 $140,000 $120,000 $500,0003 1. Share price 2. Number of shares (in millions) 3. Market value (in millions) 4. Weight* 5. Expected Return 6. Risk: Volatility 7. Sharpe ratio (Risk-free rate = 4%) 12% 24% 18% 5.8% 15% 7% 18% 9.4% 30% 0.180 28% 11.8% 40% 0.195 13% 50% 100% 10% 20% 0.300 25% 0.120 0.120 0.180 1 The figures for the five stocks are given. 2 Market value = Price (row 1)