Ques1 -

Suppose the current market risk expected excess return is 14%. Company Z has a standard deviation of 10%, a beta of 1.3, and an expected rate of return of 20%. The standard deviation of the market portfolio is 14%. Assume that all stocks are correctly priced by the CAPM.

a) What are the levels of the risk-free rate and the expected return on the market portfolio in this economy?

b) Company G has a standard deviation of 16% and a beta of 0.8. What is the expected return on company G?

c) Suppose you invested $190,000 in Z and G stocks. The beta of your portfolio is 0.90. How much did you invest in each stock? What is the expected return of this portfolio? Is it efficient if its standard deviation is 12%? Explain and interpret your answer

Ques 2-

Suppose you equally invest $700,000 in two stocks with the following characteristics: Stock X has an expected return of 10% and a standard deviation of 8%. Stock T has an expected return of 18% and a standard deviation of 14.

Determine the expected return and standard deviation on a portfolio of stocks X and T, when the two stocks have a negative correlation of -0.5 and when they are positively perfectly correlated.

Interpret and compare your answers in these two cases.