Stock A has a standard deviation of return of 40%; Stock B 30%. Stock A has a return correlation coefficient with the S&P500 of 0.32; Stock B 0.85. S&P 500 has an expected return of 12.5% and a standard deviation of return of 20%, while T-bill rate is 3.8%.

1. What is the un-diversifiable risk of Stock A? Stock B? Which stock has greater risk?

2. What is the beta of Stock A? Stock B?

3. What is the risk premium for S&P500? Stock A? Stock B?

4. What is the required rate of return for Stock A? Stock B?

Stock A is expected to pay a dividend of $1.25 in a year and is expected to have a price of $25 in a year. Stock B is expected to pay a dividend of $0.50 each year for the next three years and is expected to have a price of $30 in three years.

1. Determine the current value of Stock A. (Hint: find the present value of future cash flows using the required rate of return derived from above for Stock A.)

2. Determine the current value of Stock B. (Hint: find the present value of future cash flows using the required rate of return derived from above for Stock B.)

3. If Stock A has an expected return of 8.5%, will you invest in Stock A? Why or why not?

4. If Stock B has an expected return of 15%, will you invest in Stock B? Why or why not?