Question 1 (20 Marks) Risk & Return [CLO 4]

1. Security A has an expected return of 7%, a standard deviation of expected returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -0.5. Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation coefficient with the market of 0.7, and a beta coefficient of 1.0.

In a single=asset portfolio, Which security is riskier? Why?(2 Marks)

1. Stocks A has the following historical returns reported in the sample below:

YearStock A (K_A)

2002(10%)

200318.50%

200438.67%

200514.33%

200633.00%

b)What is the Risk per unit return of Stock A(7 Marks)

1. ERCI Corporation is a holding company with four main subsidiaries. The percentage of its business coming from each of the subsidiaries, and their respective betas are as follows: (ST-3)

SUBSIDIARY% OF BUSINESSBETA____

Electric Utility60%0.70

Cable Company25%0.90

Real Estate10%1.30

International/Special Projects5%1.50

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Assume that the risk free rate is 6% and the market premium is 5%. What is the holding company's required rate of return?(7 marks)

1. If the Treasury bill rate on a Security A is 7% and the return on the market is 10%, the expected Return is 15%; and the security's beta is 0.8. What is the recommended trading Strategy for this Security?(4 marks)