The probability distribution of the risky funds is as follow:

Expected return Standard deviation

Stock Fund 20% 30%

Bond Fund 12 15

Correlation between the fund return is 0.1.

What investment proportions the minimum-variance portfolio? What si the expected deviation of this portfolio?

6. The correlation coefficient between pairs of stocks are as follows: Corr(A,B)=.85; Crr(A,C)=.6;Corr(A,D)=.45. Each stock has an expected return of 8% and a standard deviation of 20%.

If your entire portfolio is now composed of stock A and you can add some of only one stock to your portfolio, which one would you select?

7. Which one of these portfolios can not lie on Markowitz efficient frontier?

Portfolios Expected returns Standard deviation

W 15% 38%

X 12 15

Z 5 7

Y 9 21

8. Three stocks A, B, C have the following statistics:

Stock A B C

Standard deviation of returns .40 .20 .40

Correlation of returns

Stock A B C

A 1.0 0.90 0.50

B 1.00 0.10

C 1.00

Based ONLY on the information provided and given a choice between a portfolio made up of equal amounts of stock A & B or a portfolio made up of equal amounts of stock B & C, state which portfolio would you recommend and why. No computations are required.

9. The market price of security is $50. Its expected rate of return is 14%. The risk free rate is 6% and the market risk premium is 8.5%. What will be the market price of this security if its covariance with the market doubles (all other variables held constant)? Assume the stock is expected to pay a constant dividend in perpetuity. [31.82]

10. Khan is buying a firm with an expected perpetual cash flow of $1,000 but he is not sure of the risk. If he thinks the beta of the firm is 0.5, when in reality it is 1, how much more will he