What is the expected return on solomon stock


Question 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?

Question 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?

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