Problem 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?
Problem 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?