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Expected return, Standard Deviation, CAPM

1. Suppose the expected returns and standard deviations of stocks A and B are E (RA) = 0.15, E (RB) = 0.25, sA = 0.1, and sB = 0.2, respectively.
Calculate the expected return and standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation between the returns on A and B is 0.5.
Calculate the standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation coefficient between the returns on A and B is -0.5.
How does the correlation between the returns on A and B affect the standard deviation of the portfolio?
In the context of the problem scenario, what are some business decisions that a manager would be able to make after solving the problem?
Is there any additional information missing from the problem that would enhance the decision-making process?

2. Suppose the expected return on the market portfolio is 13.8 percent and the risk-free rate is 6.4 percent. Solomon Inc. stock has a beta of 1.2. Assume the capital-asset-pricing model holds.
What is the expected return on Solomon's stock?
If the risk-free rate decreases to 3.5 percent, what is the expected return on Solomon's stock?

In the context of the problem scenario, what are some business decisions that a manager would be able to make after solving the problem?
Is there any additional information missing from the problem that would enhance the decision-making process?

Solution Summary

Answers to 2 questions:
1)calculates the Expected return and Standard Deviation of a portfolio of 2 stocks given the expected returns and standard deviation of returns of the two stock, the coefficient of correlation of returns of the two stocks and the proportion of the two stocks in the portfolio
2) calculates expected return using CAPM (capital-asset-pricing model)

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