Problem 1: The standard deviation of stock returns for Stock A is 30%. The standard deviation of the market return is 20% and the correlation between Stock A and the market is 0.75.
a) Calculate Stock A's beta.
b) In a bull market with rapidly increasing stock prices, will Stock A likely outperform or underperform the average stock? Why?
c) Is the beta of a diversified portfolio less stable or more stable than the beta of a single security? Why?
Problem 2: How might a large retailer take advantage of each of the following (Do not merely provide a definition. Provide a specific example of each.):
a. Flexibility option
b. Growth option
c. Investment timing option
d. Abandonment option
e. Decision-tree analysis