Question 5 (15

Points) (i) Given the following information: Expected return on Stock A .15 (15%) Standard deviation of return 0.3 Expected return on Stock B .18 (18%) Standard deviation of return 0.4 Correlation coefficient of the returns on Stock A and Stock B 0.75

a. What are the expected returns and standard deviations of the following portfolios? 1. 100 percent of funds invested in Stock A 2. 100 percent of funds invested in Stock B

3. 50 percent of funds invested in each stock? b. What would be the impact if the correlation coefficient were -0.42 instead of 0.75?

(i) You invest $135 in a mutual fund that grows 12 percent annually for three years. Then the fund experiences an exceptionally bad year and declines by 25 percent. After the bad year, the fund resumes its 12 percent annual return for the next three years.

a. What is the average percentage change for the seven years?

b. If you liquidate the fund after nine years, how much do you receive? c. What is the annualized return on this investment using a dollar-weighted calculation and using a time-weighted calculation?