1) A) Given the following information, calculate the required return on Stock ABC.

- U.S. Treasury rate: 3%

- Beta for ABC stock: 2.25

- Required return on the market: 11%

1) B) If the Nominal Risk Free rate increases to 4%, calculate the required return on Stock ABC. Also draw the Security Market Line graph to illustrate the change from Question 1A above. 1) C) If the Treasury Rate decreases to 2%, calculate the required return on Stock ABC. Also draw the Security Market Line graph to illustrate the change from Question 1A above.1) D) If the required return on the market increases to 13%, calculate the required return on Stock ABC. Also draw the Security Market Line graph to illustrate the change from Question 1A above.1) E) If the required return on the market decreases to 10%, calculate the required return on Stock ABC. Also draw the Security Market line graph to illustrate the change from Question 1A above.

2) Given the following information, calculate the required return on the portfolio of four stocks.

Stock Beta $ Invested in the Stock

A 1.5 $400,000

B -.5 $600,000

C 1.25 $1,000,000

D .75 $2,000,000

Required return on the market: 14%

Treasury Rate: 3%

3) An investor owns a portfolio of a $10,000 investment in each of 20 different stocks. The portfolio has a beta of 1.20. The investor would like to sell one of the stocks in the portfolio with a beta of 1.1 for$10,000 and use the proceeds to buy another stock with a beta of 1.5. What would the new portfoliobeta be?

4) Given the following information, make the following decisions. An investor is trying to choose which stock to have in his portfolio.

Stock X Stock Y

Expected Return 7% 12%

Standard Deviation 35% 10%

Correlation Coefficient -.3 .7

Beta -.5 1.0

A) If an investor will only have a single asset portfolio, what choice should the investor make?

Why?

B) If the investor has a multi-asset portfolio and is deciding which stock to add to the portfolio, what choice should the investor make? Why?