Q1 Hazel Morrison, a mutual fund manager, has a $60 million portfolio with a beta of 1 00 The risk free rate is 3 25 , and the market risk premium is 6 00 Hazel expects to receive an additional $40 million, which she plans to invest in additional stocks After investing the additional funds, she wants the fund's required and expected return to be 15 What must the average beta of the new stocks be to achieve the target required rate of return Q2 Campbell's father holds just one stock, East Coast Bank (ECB), which he thinks is a very low risk security Campbell agrees that the stock is relatively safe, but he wants to demonstrate that his father's risk would be even lower if he were more diversified Campbell obtained the following returns data shown for West Coast Bank (WCB) Both have had less variability than most other stocks over the past 5 years Measured by the standard deviation of returns, by how much would his father's historical risk have been reduced if he had held a portfolio consisting of 50 ECB and the remainder in WCB Year ECB WCB 2014 20 00 25 00 2015 10 00 15 00 2016 35 00 5 00 2017 5 00 10 00 2018 15 00 35 00

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Question: Q1. Hazel Morrison, a mutual fund manager, has a $60 million portfolio with a beta of 1.00. The risk-free rate is 3.25%, and the market

Q1. Hazel Morrison, a mutual fund manager, has a $60 million portfolio with a beta of 1.00. The risk-free rate is 3.25%, and the market risk premium is 6.00%. Hazel expects to receive an additional $40 million, which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 15%. What must the average beta of the new stocks be to achieve the target required rate of return?

Q2.

Campbell's father holds just one stock, East Coast Bank (ECB), which he thinks is a very low-risk security. Campbell agrees that the stock is relatively safe, but he wants to demonstrate that his father's risk would be even lower if he were more diversified. Campbell obtained the following returns data shown for West Coast Bank (WCB). Both have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would his father's historical risk have been reduced if he had held a portfolio consisting of 50% ECB and the remainder in WCB?
	Year	ECB	WCB
	2014	20.00%	25.00%
	2015	-10.00%	15.00%
	2016	35.00%	-5.00%
	2017	-5.00%	-10.00%
	2018	15.00%	35.00%

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