What are the portfolio weights for a portfolio that has 170 shares of Stock A that sell for $91 per share and 145 shares of Stock B that sell for $110 per share?

2. You own a portfolio that is 16 percent invested in Stock X, 31 percent in Stock Y, and 53 percent in Stock Z. The expected returns on these three stocks are 9 percent, 12 percent, and 14 percent, respectively.

Required:

What is the expected return on the portfolio?

3. Consider the following information:

State ofEconomy Probability of Stateof Economy Rate of Returnif State Occurs

Recession 0.25 –0.09

Normal 0.45 0.11

Boom 0.30 0.30

Required:

Calculate the expected return. (Do not include the percent sign (%).

4. You own a stock portfolio invested 24 percent in Stock Q, 21 percent in Stock R, 44 percent in Stock S, and 11 percent in Stock T. The betas for these four stocks are 0.86, 0.92, 1.32, and 1.77, respectively.

Required:

What is the portfolio beta?

5. A stock has a beta of 1.24 and an expected return of 12.2 percent. A risk-free asset currently earns 4.00 percent.

Required:

(a) What is the expected return on a portfolio that is equally invested in the two assets? (

(b) If a portfolio of the two assets has a beta of 0.84, what are the portfolio weights?

(c) If a portfolio of the two assets has an expected return of 11.4 percent, what is its beta?

(d) If a portfolio of the two assets has a beta of 2.44, what are the portfolio weights?

6. Stock J has a beta of 1.27 and an expected return of 13.51 percent, while Stock K has a beta of 0.82 and an expected return of 10.45 percent. You want a portfolio with the same risk as the market.

Required:

1. What is the portfolio weight of each stock?

2. What is the expected return of your portfolio?

7. Consider the following information on a portfolio of three stocks:

State of Economy Probability Stock A Stock B Stock C

Of State of Economy Rate of Return Rate of Return Rate of Return

Boom 0.13 0.04 0.34 0.58

Normal 0.53 0.12 0.14 0.22

Bust 0.34 0.18 –0.13 –0.37

Required:

(a) If your portfolio is invested 36 percent each in A and B and 28 percent in C, what is the portfolio’s expected return?

(b) If the expected T-bill rate is 3.85 percent, what is the expected risk premium on the portfolio?

8. You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible investments is given below:

Asset Investment Beta

Stock A $132,000 0.77

Stock B $148,000 1.22

Stock C 1.37

Risk-free asset

Required:

1 How much will you invest in Stock C?

2. How much will you invest in the risk-free asset?

9. Suppose you observe the following situation:

State of

Economy Probabilityof State Return if State Occurs Stock A Stock B

Bust 0.19 −0.05 −0.08

Normal 0.74 0.16 0.17

Boom 0.07 0.52 0.33

Required:

(a) Calculate the expected return on each stock.

(b) Assuming the capital asset pricing model holds and stock A’s beta is greater than stock B’s beta by .23, what is the expected market risk premium?

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