XYZ stock has a standard deviation of return of 8.29% and the stock index has a standard deviation of return of 6.84%. The correlation coefficient between stock return and stock index return is 0.74. The stock is expected to pay dividend of $5 in one year and its expected price in one year is $70. The risk-free rate is 3.5%. The stock market index has an expected return of 12%.

(1) Estimate the beta of the stock. Is the stock riskier than the stock market index? Explain.

(2) Use the security market line to determine the required rate of return of the stock.

(3) Determine the value of the stock.

(4) If the stock has a current price of $65, what is the expected return? Would you investment in the stock? Explain.

(5) If the stock has a current price of $69, what is the expected return? Would you invest in the stock? Explain.

B. Stock A has an expected return of 10%, while Stock B has an expected return of 20%. Stock A has a standard deviation of return of 12% while stock B has a standard deviation of return of 30%.

(1) What will be the expected return of a portfolio composed of 50% Stock A and 50% Stock B?

(2) What will be the standard deviation of a portfolio composed of 50% Stock A and 50% Stock B when risk reduction may be achieved by diversification? (Give a range.)