Problem 5, Question 1 You create a portfolio investing 40% in stock A with standard deviation 10%, and 60% in stock B with standard deviation 20%. The portfolio has a standard deviation of 14.75%. What is the correlation coefficient of the two securities? a. 0.3 b. 0.1 Oc 0.5 d. 0.7 e. 0.9 f 0.2 Oh. 0.8 OL 1 0.6 Ok 0.4

Question 2 The expected returns and standard deviation of returns for two securities are as follows:   Security Z Security Y   Expected Return 15% 35%   Standard Deviation 20% 40%       The correlation between the returns is +0.25. a) Calculate the expected return and standard deviation for the following portfolios:   i) All in Z ii) 0.75 in Z and 0.25 in Y iii) 0.5 in Z and 0.5 in Y iv) 0.25 in Z and 0.75 in Y v) All in Y b) Draw the mean-standard deviation frontier.   c) Which portfolios might not be held by an investor who likes high expected return and low standard deviation?

Question 3 A portfolio consisting of 5 securities could have its beta factor computed Security % of portfolio Beta factor of A B с D E 20 10 15 20 35 security 0.90 1.25 1.10 1.15 0.70 as follows: Weighted beta factor 0.180 0.125 0.165 0.230 0.245 If the risk-free rate of return is 12% and the expected return on the market is 20%. Determine the expected return of this portfolio.

A4 a. Suppose we have two risky assets, Stock I and Stock J, and a risk-free asset. Stock I has an expected return of 25% and a beta of 1.5. Stock J has an expected return of 20% and a beta of 0.8. The risk-free asset’s return is 5%. a. Calculate the expected returns and betas on portfolios with x% invested in Stock I and the rest invested in the risk-free asset, where x% = 0%, 50%, 100%, and 150%.