You have purchased a portfolio of equal investments in 4 stocks X,Y,W,Z that have the following 's: _W = .65; _X = 1.4; _Y = .8; _Z =.5.

(a ) Using CAPM to forecast the expected return for the portfolio next year, what is a reasonable prediction? Show your calculation (6 points)

_W = .65; _X = 1.4; _Y = .8; _Z =.5.

(b) Which of the following is true about the diversification of risk from combining the 4 stocks above into a portfolio?

(i) The portfolio will remove a significant amount of firm specific risk (ii) There is only a small amount of diversification because it is only 4 stocks

(iii) We would need to know more about the industry of each company, as diversification does not work within the same industry(iv) None of the above