RISK AND RETURN

You are thinking about purchasing 2,000 shares in the following firms:

Firm	Number of Shares	Firm's Beta	Expected Return
Firm A	200	0.75	20%
Firm B	400	1.47	10%
Firm C	400	0.82	16%
Firm D	700	1.6	12%
Firm E	300	0.6	15%

Additional Information: The expected return on the market is 18% and the risk-free rate is 8%.

A. If you purchase the number of shares specified, calculate the beta of your portfolio. (Round off your answer to 2 decimal placed).

B. Calculate the expected return on the portfolio using CAPM.

C. Beta and standard deviation are measures by which the level of risk on investment is calculated. Discuss the difference between these two measures of risk. Use examples to illustrate your answer.

D. Draw the security market line.

E. Plot the shares on the graph and label the shares that are under-priced and overpriced.

F. Conventional investment wisdom is to hold a diversified portfolio. Diversification is seen as the responsible approach to invest. To maximize the benefit of diversification, an investor must analyse the correlation. Explain the concept of portfolio diversification, the benefits of diversification and why does portfolio diversification rely on correlation analysis.