7.The risk free rate is 3% and the expected return of the market portfolio is 9%. The expected return of stock Y is 6% and the standard deviation of stock Y is 10%. The correlation between stock Y and the market return is 0.8.

Calculate the beta of stock Y.

Calculate the standard deviation of the market portfolio.

Stock Z has similar expected return as stock Y (6%) and standard deviation of 0.2. What is the correlation between stock Z and the market portfolio?

8. Consider the following three stocks in the market.

Which of the following sentences is True?

CML A

B

B1.The total risk of C is higher than the total risk of A

2.The systematic risk of B and C is similar.

3.The specific risk of A and C is similar.

4.B has higher correlation with the market than A.

5.The systematic risk of A is higher than the systematic risk of C.

10. Your firm is considering an investment in a new project. The project requires an initial investment of $10,000. Based on the probability below, the project is expected to produce the following cash flow in one year:

Probability Cash Flow

25% 10,000

50% 12,000

25% 25,000

Further, according to your analysis, you found that the beta of the firms stock is 1.5. Additionally, you are given the following information to help with your investment decision:

- The beta of the new project is 2.

- The expected return on the market portfolio is 15%.

- The risk free rate in the market is 3%.

Based on the above information, should the firm undertake the project?