Your portfolio consists of 250 shares of Stock K with a current market price of $40 per

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Question:

Your portfolio consists of 250 shares of Stock K with a current market price of $40 per share, 150 shares of Stock Q with a current market price of $25 per share and $8,000 invested in the risk-free asset. The beta of Stock K is 1.3 and the beta of Stock Q is 1.05. What is the beta of your portfolio?

2. You can invest in two assets: stock K which has an expected return of 20% and a standard deviation of 30% and the risk free which has an expected return of 6%. You have $20,000 to invest.

a. How can you create a portfolio with an expected return of 17%?

b. How can you create a portfolio of these two assets which has an expected return of 22%? How much money is invested in each asset?

3. Suppose you are considering investing in two stocks: Flowers to Sell which has an expected return of 19% and a standard deviation of 30% and Umbrellas to Rent which has an expected return of 12% and a standard deviation of 25%. The correlation between the two stocks is -0.1 (negative). What would be the expected return and standard deviation of a portfolio equally invested in the two?

4. A stock has a beta of 0.8 and an expected return of 13%. A risk-free asset currently earns 7%.

What is the expected return on a portfolio that is invested 60% in the stock and 40% in the risk free?

How can you create a portfolio with a beta of 0.6? What would be its expected return

5. Biotechnica has a beta of 1.9. The risk-free borrowing and lending rate is 5% and the market risk premium is 9%. Biotechnica is not expected to pay a dividend for several years, yet it is currently priced at $20 per share.

a. What price do investors expect to see one year from now if market rates are stable and there is no change in expectations about the company's earnings?

6. You observe two stocks that you believe are both properly priced. Stock A has a beta of 1.4 and an expected return of 19.5% and Stock B which has a beta of 0.85 and an expected return of 14%. Based on CAPM, what is the risk-free rate and the expected return on the market?