Q7. (7 points) The following graph depicts the expected returns and standard deviations of 6 different assets. You are a risk-averse investor who plans to invest in one (and only one) of those assets. You nwo vnsamos have no other information on the assets. Which assets would you definitely NOT choose? line cono 161 291smiles Expected Return Be01 16 beinpopzib 916 ewolt Standard Deviation Sllab Q8. (11 points) You have a portfolio with a standard deviation of 30% and an expected return of 18%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 20% of your money in the new stock and 80% of your money in your existing portfolio, which one should you add? Expected Return Standard Deviation Correlation with Your Portfolio's Returns Stock A 15% 25% 0.2 Stock B 15% 20% 0.6Q9. (9 points) Investors expect the market rate of return in the coming year to be 12%. The T-bill rate is is $100 million. 4%. Changing Fortunes Industries' stock has a beta of .5. The market value of its outstanding equity a. What is your best guess currently as to the expected rate of return on Changing Fortunes' stock? You believe that the stock is fairly priced. b. If the market return in the coming year actually turns out to be 10%, what is your best guess as to the rate of return that will be earned on Changing Fortunes' stock? c. Suppose now that Changing Fortunes wins a major lawsuit during the year. The settlement is $5 million. Changing Fortunes' stock return during the year turns out to be 10%. What is your best guess as to the settlement the market previously expected Changing Fortunes to receive from the lawsuit? (Continue to assume that the market return in the year turned out to be 10%.) The magnitude of the settlement is the only unexpected firm-specific event during the year. Sbode s noth Malt offothog of zest saudiunga ver The Capital Asset Pricing Model and Beta Q10. (9 points) Consider a portfolio consisting of three securities with the following information: Security Amount invested Beta Expected Return $1 million 1.0 10% I $2 million 2.0 18% U $2 million 0.5 6% a. What is the portfolio's beta? b. If the CAPM holds, what is the risk-free rate and the market risk premium?Q11. (9 points) True or false? T - True; F - False a. Investors demand higher rates of return on stocks with more variable rates of return. b. The CAPM predicts that a security with a beta of 0 will offer a zero expected return. c. An investor who has $10,000 in Treasury bills and $20,000 in the market portfolio will have a beta of 2.0. d. An undiversified portfolio with a beta of 2.0 is less than twice as risky as the market portfolio. and nolllim ee e. If stocks were perfectly positively correlated, diversification would not reduce risk nino?) newstant moul f. Diversification over a large number of assets completely eliminates risk laz ard to abusingsmelt g. Diversification works only when assets are uncorrelated h. A stock with a high standard deviation may contribute less to portfolio risk than a stock with a lower standard deviation Q12. (7 points). An all-equity firm is considering the following projects: onT Project Beta IRR 3 83 9.4% 92 1 1.6 X X N 1.09 12.9 1.35 14 .1 The T-bill rate is 4 percent, and the expected return on the market is 12 percent. Which projects would be incorrectly accepted or rejected if the firm' overall cost of capital of 12% were used as a hurdle rate