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1. Currently, CSH Inc. stock has a market price of $20/share and EJH Co. stock has a market price of $30/share. You forecast that E[r CSH] = 12% and E[rEJH] = 15%. a. If you purchase 100 shares of CSH stock and 200 shares of EJH stock, what are the weights, i.e., wCSH and wEJH, of these stocks in your portfolio? b. What is the expected return, E[rp], of your portfolio? 2. Briefly explain why you would / should expect the correlation of the returns from two randomly chosen stocks to be positive? 3. Is a security with a beta of 0 risk-free? Why or why not? 4. You are analyzing a stock that has a beta of 1.2. The risk-free rate of return is 4% and you estimate that the market risk premium is 6%. If this stock has an expected return of 11%, would you consider this stock a good investment opportunity? Why or why not? 5. You forecast that the next dividend ATA Inc. will pay will be $1.20/share. You then expect dividends to grow at a constant rate of 3% forever. If you estimate that ATA =0.80, the risk-free rate equals 4%, and the expected return on the market portfolio is10%, what is the most you would be willing to pay for this stock today? 6. If you construct a portfolio from three stocks with the following weights and betas, will your portfolio have above or below average sensitivity to systematic (i.e., market) risk? Why? (see page 387 for help) Stock A B C Weight 25% 30% 45% Beta 1.10 0.60 0.95