Exercise #

2:Risk. Consider the following datafor two risky stocks

Rate of Return

Year ABC XYZ

2013 5% +19%

2012 +20 +10

2011 +27 +4

Calculate the expected rate of return and standard deviation for

a portfolio invested 35% in ABC and

65% in XYZ.

ER 35/65= = ............[5]................. %

StDev 35/65= = ............[6]................. %

Exercise #3: Assume the risk-free rate of 3% and a 10%expected market return.The following table shows betas for three companies. Calculate each stock's expected rate of return using CAPM. Based on your fundamental analysis, you expect Apple to return 17%, Alcoa to return 12%, and Wal-mart to return 6.6%. Indicate whether the stock is over or underpriced?

Company Beta Exp Return Over-/Under-priced

Apple 1.38 [7] [8]

Alcoa 1.10

Wal-mart 0.45 [9] [10]

Exercise #4:The risk-free rate is 4%; the expected return on the market is 10%. Stock A has a beta of 0.75; Stock B has a beta of 1.4.Compute the expected return on a portfolio with 45% in A and 55% in B.

ER 45/55 = ......[11].................. %