1. You are evaluating whether you should buy Flash Inc shares. The dividend that has just been paid is $1.50 per share. The current market price is $30 per share. Flash has stated in their latest annual financial statements that they expect growth to be 8% over the next year. If your expected return for investments like Flash is 12%, by calculation decide whether you should invest in Flash Inc. shares with a brief explanation for your decision.

table

year stock A stock B

2007 8 12

2008 21 27

2009 -27 -32

2010 11 18

2011 18 24

a. If you were an investor that did not like taking high risks, which stock would you prefer and why?

b. Calculate the covariance between stocks A and B

c. Calculate the correlation coefficient for stocks A and B.

d. Interpret what the correlation coefficient is telling you about the relationship between stocks A and B.

stock A E(r)=9%, standard deviation =36%

stock b E (r) 15%, standard deviation =62%

1. Calculate the expected return of each stock
2. If a portfolio was created with from 30% of stock J and 70% of stock K, what is the expected return of the portfolio?
3. Calculate the standard deviation of each stock
4. Calculate the covariance between the two stocks
5. Calculate the correlation coefficient between the two stocks
6. What is the portfolio standard deviation?