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1. Rate of Return If State Occurs State of Economy Probability of State of Economy Stock A .35 .25 .30 .10 .21 .11 .05 -.02 Boom Good Poor Bust Stock B .34 .25 -.09 -.18 Stock C .40 .15 -.09 -.09 a. Your portfolio is invested 25 percent each in A and C, and 50 percent in B. What is the expected return of the portfolio? (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Expected return % b-1.What is the variance of this portfolio? (Round your answer to 5 decimal places.) Variance of this portfolio b-2.The standard deviation? (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Standard deviation % 2. Fill in the missing information in the following table. Assume that Portfolio AB is 40 percent invested in Stock A. (Round your answer to 2 decimal places. Negative amounts should be indicated by a minus sign. Omit the "%" sign in your response.) Year 2006 2007 2008 2009 2010 Avg return Std deviation Stock A 15% 34.6% -16.2% 24.8% 15.4% % % Annual Returns on Stocks A and B Stock B Portfolio AB 23% -34.4% 44.4% 17.2% 27.6% % % % % % % % % % 3. Given the following information, calculate the expected return and standard deviation for a portfolio that has 54 percent invested in Stock A, 30 percent in Stock B, and the balance in Stock C. answer to 2 decimal places. Omit the "%" sign in your response.) Returns State of Economy Boom Bust Probability of State of Economy Stock A .80 .20 Stock B 17% 9 Expected return Standard deviation 18% 0 Stock C 23% -9 % % 4. A stock has an expected return of 14.1 percent, the risk-free rate is 4.3 percent, and the market risk premium is 9 percent. What must the beta of this stock be? (Round your answer to 2 decimal places.) Beta = 5. You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.65, and the total portfolio is exactly as risky as the market, what must the beta be for the other stock in your portfolio? (Round your answer to 2 decimal places.) Beta 6. A stock has a beta of 1.1 and an expected return of 9 percent. A risk-free asset currently earns 4 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Expected return % b. If a portfolio of the two assets has a beta of 0.8, what are the portfolio weights?(Round your answers to 2 decimal places. Omit the "%" sign in your response.) Weight xS xrf % % c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta? (Round your answer to 2 decimal places.) Beta d. If a portfolio of the two assets has a beta of 3.30, what are the portfolio weights? (Negative amounts should be indicated by a minus sign. Omit the "%" sign in your response.) Weight xS xrf % % rev: 11_19_2012 7. Stock Y has a beta of 1.2 and an expected return of 15 percent. Stock Z has a beta of 0.7 and an expected return of 10 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Risk-free rate % 8. Suppose you observe the following situation: Security Peat Co. Beta 1.20 Expected Return 10.2 Re-Peat Co. .90 9.1 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Expected return Risk-free rate % %
