6. Using the data in the table to the right, calculate the return for investing in the stock from January 1 to December 31. Prices are after the dividend has been paid.

Date	Price	Dividend
1/2/03	$32.64	-
2/5/03	$31.49	$0.22
5/14/03	$30.76	$0.18
8/13/03	$32.66	$0.22
11/12/03	$38.52	$0.19
1/2/04	$43.88	-

Return for the entire period is __

(Round to two decimal places.)

7. You observe a portfolio for five years and determine that its average return is 12.7% and the standard deviation of its returns in 19.9%. Would a 30% loss next year be outside the 95% confidence interval for this portfolio?

The low end of the 95% prediction interval is ___%

(Enter your response as a percent rounded to one decimal place.)

A.No, you cannot be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is less than 30%.

B.Yes, you can be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is less than 30%.

C.Yes, you can be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is greater than 30%.

D.No, you cannot be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is greater than 30%.

8. Consider two local banks. Bank A has 84 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has a 6% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $84 million outstanding, which it also expects will be repaid today. It also has a 6% probability of not being repaid. Calculate the following:

a. The expected overall payoff of each bank.

b. The standard deviation of the overall payoff of each bank.

9. You are a risk-averse investor who is considering investing in one of two economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move togetherin good times all prices rise together, and in bad times they all fall together. In the second economy, stock returns are independentone stock increasing in price has no effect on the prices of other stocks. Which economy would you choose to invest in? Explain.

(Select the best choice below.)

A. A risk averse investor would prefer the economy in which stock returns are independent because by combining the stocks into a portfolio he or she can get a higher expected return than in the economy in which all stocks move together.

B. A risk averse investor would choose the economy in which stock returns are independent because risk can be diversified away in a large portfolio.

C. A risk averse investor would choose the economy in which stocks move together because the uncertainty is much more predictable, and you have to predict only one thing.

D. A risk averse investor is indifferent in both cases because he or she faces unpredictable risk.