Determine the required return for each company using the

Question

1. You are attempting to construct a minimum variance portfolio (MVP) with two well- diversified funds, S and B. The following table contains relevant information:

Fund	Expected Return	Expected Standard Deviation of Returns
S	20%	30%
B	12%	15%
Correlation of S and B = 0.10

Determine the expected return and standard deviation of the MVP consisting of funds S and B.

2. You are invested in risk-free assets with a return of 12% in combination with a risky portfolio with an expected return 30% and a standard deviation of 40%. Your total standard deviation is 30%. Determine your expected return.

3.

Stock	Expected Return	Beta	Firm-specific standard deviation
A	13%	0.8	30%
B	18%	1.2	40%
σ market = 22%; Risk-free rate = 8%

a. Using data from the above table, determine the standard deviations of Stocks A and B.

b. Determine your expected return and portfolio beta if you combine the stocks and the risk free asset in the following weights: w_RF = 0.25; w_A = 0.30; w_B = 0.45.

4. You have regressed the excess returns for two stocks on the corresponding excess returns for the market with the following results:

R_A = 0.01 + 1.2(RM); R2 = 0.576; residual standard deviation = 0.103

R_B = -0.02 + 0.8(R_M); R² = 0.436; residual standard deviation = 0.0.091

a. Which stock has more firm-specific risk?

b. Which firm has more market risk?

c. The market explains a greater percentage of the volatility of returns for which stock?

d. Assume the risk free rate is constant at 6%. Determine the regression intercept for stock A, if you had used total returns instead of excess returns.

5. You currently hold a passive portfolio and are considering the addition of another stock. Select the more appropriate stock to add to your portfolio and determine what, if any, action should be taken with the other.

Stock	Expected Return	Beta	Standard Deviation
A	11%	0.8	10%
B	14%	1.5	11%
RF = 6%; E(RS&P) = 12%

6. Determine whether each of the following companies is over- or underpriced.

Company	Forecasted return	Standard Deviation	Beta
All's Well	12%	8%	1.5
Ends Well	11%	10%	1.0
RF = 4%; RM = 10%

Determine the required return for each company using the CAPM.