Problem: Please use the following information to answer the following questions. The return on the risk-free asset is 4% and the return on the market is 14%.
Security Standard Deviation Beta
A 20% 1.2
B 25% 0.8
1) Which security (A or B) has the least total risk? __________________
2) Which security (A or B) has the least systematic risk? __________________
3) Which security (A or B) has the greatest diversifiable risk? ____________________
4) What is the portfolio beta if you invest 35% in A, 45% in B and 20% in the risk-free asset?
5) What is the portfolio expected return if you invest 35% in A, 45% in B and 20% in the risk-free asset?
6) What is the portfolio expected return if you invest 140% in A and the remainder in the risk-free asset via borrowing at the risk-free interest rate?
7) If you forecast the expected rates of returns for both Security A and security B, you get 14%. Which security should you buy/sell/hold as a result?