1. The Berry Corporation is considering three possible capital projects for next year. Each project has a one year life, and project returns depend on next year's state ofeconomy. The estimated rates of return are shown in the table:

State ofprobability ofRate of Return if state Occurs

Economy state of Econ.ABC

Recession0.2510%9%14%

Average0.50141312

Boom0.25161810

A.Find each project's expected rate of return, variance, standard deviation, and coefficient of variation.

B.Rank the alternatives on the basis of (1) expected return (2) risk.

C.Assume that the Berry Corporation is going to invest one third of its available funds in each project. That is, Berry will MAKE a portfolio of three equally weighted projects.

1.What is the expected return on the portfolio?

2.What are the variance and standard deviation of the portfolio?

3.What are the covariance and correlation coefficient between projects A and B? Between projects A and C?

Q2.

Stock Y has a beta of 1.59 and an expected return of 25%. Stock Z has a beta of 0.44 and an expected return of 12%. The risk-free rate is 6% and the market risk premium is 11.3.

A.Are these stocks correctly priced?

B.If the stocks are not correctly priced, what would the risk free rate have to be for the two stocks to be correctly priced?

Q3.

You want to FORM a portfolio equally as risky as the market, and you have K.250,000 to invest. Given this information, fill in the rest of the following table:

AssetInvestmentBeta

Stock AK.70,0000.90

Stock B70,0001.20

Stock C1.60

Risk free asset

Q4

Consider the following information on stocks I and II:

State ofprobability ofRate of Return if state Occurs

Economystate of Econ.Stock IStock II

Recession0.200.06- 0.25

Normal0.550.470.11

Boom0.250.230.68

The market risk premium is 8%, and the risk free rate is 6%. Which stock has the most Systematic risk? Which one has the most unsystematic risk? Which stock is "riskier"? Explain.