The end-of-year stock prices for KFD Corporation for the past six years, and annual dividends per share, are as follows:

Year Stock Price Dividends

2009 $ 85.23 $ 0.22

2008 $ 79.14 $ 0.18

2007 $ 37.86 $ 0.14

2006 $ 45.99 $ 0.10

2005 $ 23.33 $ 0.10

2004 $ 14.67

You have the following expectations for KFDs stock price during 2010:

Outlook Probability Stock Price

Good 45% $ 93.42

Average 35% $ 89.15

Bad 20% $ 81.87

You think KFD will pay a dividend of $ 0.22 during 2010, regardless of the economic outlook.

You are now considering the possibility of adding KFD stock to your portfolio, which currently consists of equal weights of Mellon Corporation and Insignia Enterprises.

The expected returns and standard deviation of expected returns for Mellon and Insignia are:

Mellon Corporation Insignia Enterprises

Expected return 23.14% 18.93%

Standard deviation 26.56% 20.77%

The correlation coefficients among the three corporations are:

Mellon Corporation Insignia Enterprises KFD Corporation

Mellon Corporation 1.0000

Insignia Enterprises 0.5385 1.0000

KFD Corporation 0.4233 0.3982 1.0000

1. Calculate the expected return, variance, and standard deviation of a portfolio consisting of 30% Mellon Corporation, 60% Insignia Enterprises, and 10% KFD Corporation.

2. The correlation coefficient between KFD Corporation and the market is 0.2532, while the variance of the market is 0.04. Determine the beta for KFD Corporation.