# Calculate the expected return and standard deviation of a portfolio that is composed fo 35 percent A and 65 percent B when the correlation between the returns on A and B is 0.6.

1. Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.17, E(RB) = 0.27, StdDevA = 0.12, and StdDevB = 0.21, respectively.

a. Calculate the expected return and standard deviation of a portfolio that is composed fo 35 percent A and 65 percent B when the correlation between the returns on A and B is 0.6.

b. Calculate the standard deviation of a portfolio that is composed of 35% A and 65% B when the correlation coefficient between the returns on A and B is -0.6.

c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio?

2. Suppose the expected return on the market portfolio is 14.7% and the risk-free rate is 4.9%. MadeUp Company, Inc. stock has a beta of 1.3 (Assume the capital-asset-pricing model holds):

a. What is the expected return on the company's stock?

b. If the risk-free rate decreases to 3.7%, what is the expected return on the company's stock?

3. A portfolio that combines the risk-free asset and the market portfolio has an expected return of 22% and a standard deviation of 5%. The risk-free rate is 4.9%, and the expected return on the market portfolio is 19%. (Assume the capital-asset-pricing model holds): What expected rate of return would a security earn if it had a 0.6 correlation with the market portfolio and a standard deviation of 3%?

a. What financial concept or principle is the problem asking you to solve?

b. In the context of the problem scenario, what are some business decisions that a manager would be able to make after solving the problem?

c. Is there any additional information missing from the problem that would enhance the decision-making process?

d. Without showing mathematical calculations, explain in writing how you would solve the problem.

4. Suppose you have invested $50,000 in the following 4 stocks:

Security Amount Invested Beta

Stock A $10,000 0.7

Stock B $15,000 1.2

Stock C $12,000 1.4

Stock D $13,000 1.9

The risk-free rate is 5% and the expected return on the market portfolio is 18%.

Based on the capital-asset-pricing model, what is the expected return on the above portfolio?

a. What financial concept or principle is the problem asking you to solve?

b. In the context of the problem scenario, what are some business decisions that a manager would be able to make after solving the problem?

c. Is there any additional information missing from the problem that would enhance the decision-making process?

d. Without showing mathematical calculations, explain in writing how you would solve the problem.

5. You enter into a forward contract to buy a 10-year, zero-coupon bond that will be issued in 1 year. The face value of the bond is $1,000, and the 1-year and 11-year spot interest rates are 4% per annum and 9% per annum, respectively. Both of the interest rates are expressed as effective annual yields (EAYs). What is the forward price of your contract? Suppose both the spot rates unexpectedly shift downward by 1%. What is the price of a forward contract otherwise identical to yours?

a. What financial concept or principle is the problem asking you to solve?

b. In the context of the problem scenario, what are some business decisions that a manager would be able to make after solving the problem?

c. Is there any additional information missing from the problem that would enhance the decision-making process?

d. Without showing mathematical calculations, explain in writing how you would solve the problem?

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