1. The returns and their likelihood for two assets are given below. Use this information and the table to compute

a. The expected rates of return of stocks A and B are

b. The variance and standard deviations of stocks A and B.

c. The covariance of stocks A and B

d. The correlation between stocks A and B

2. You buy 100 shares of stock initially selling for $60 each, on a margin of 70% ie you borrow the balance from your broker. Ignoring interest charge:

a. How much of your own money do you invest?

b. How much do you borrow from your broker?

c. What will be your rate of return at the end of a 1-year holding period if the closing price is 40?

d. What will be your rate of return for the following stock prices at the end of a 1-year holding period if the closing price is 75?

e. Suppose the maintenance margin is 40%. How far could the stock price fall before you would get a margin call?

3. An investor with $2,000,000 to invest between T bills paying 6% and a portfolio that offers 14% with a standard deviation of 0.18 (18%).

a. If he puts 35% in T Bills and the balance in the risky portfolio, determine the expected return and risk on his complete portfolio.

b. If the investor is later evaluated and it's determine that she has a risk aversion of A=4, what is the utility of her current complete portfolio?

c. Given his risk aversion, what proportion should go into the risky portfolio? Determine the return and risk on this optimum portfolio.