Q1. If you are a risk-averse investor and you decide to hold a single stock, which stock would you prefer? Use the Coefficient of Variation (CV) to determine your answer. Explain your final choice.
a. A stock with an expected return of 18% and a standard deviation equal to 10%.
b. A stock with an expected return of 6% and a standard deviation equal to 4%.
c. A stock with an expected return of 15% and a standard deviation equal to 14%
Q2. Assume you have a portfolio with the stocks and their information:
|
Stock
|
Total $ invested
|
Beta
|
Expected Return
|
|
|
|
|
|
|
DuPont
|
$25,000
|
0.99
|
10.12%
|
|
McDonald's Corp
|
$50,000
|
0.72
|
8.16%
|
|
Ford
|
$60,000
|
1.24
|
12.2%
|
a) Calculate Beta of the Portfolio.
b) Calculate the Expected return for the portfolio using the CAPM and the beta value for the portfolio. Assume the market risk premium (Rm - Rrf) equals 6% and the Risk free rate (Rrf) equals the rate on a 2 year treasury 0.25%.
Show all work.