(We are supposed to have this worked out without using excel)

1. You are considering an investment in one of two common stocks. The standard deviations of returns for assets A & B respectively are 4.8% and 5.6%.

Common Stock A Common Stock B

Probability Return Probability Return

.50 9.0% .15 7.0%

.25 13.0% .10 9.0%

.10 15.0% .30 14.0%

.15 20.0% .45 20.0%

A. Find the expected return for both portfolios.

B. Based on risk and return, which investment do you believe is better?

C. Why?

2. The information in the table below relates to a portfolio of the 3 assets. Please answer the questions below based on this data.

Security	Beta		Return	$ Amt
X Corporation	1.95		14.0%	$2000
Y Corporation	1.15		10.0%	$4500
Z Corporation	.85		8.0%	$3500

A. What is the level of systematic risk of the portfolio of stocks X, Y and Z described in the table?

B. What is the expected return for the portfolio of 3 stocks given in the table?

C. Now, without regard to the portfolio (or the returns are given in the table), assume that the risk-free rate is 3.0% and the return on the market portfolio is currently 12.0%, according to the capital asset pricing model (CAPM), what is the expected return for each of these three individual stocks?

D. Using the assumptions given in c, what risk-premium do investors require for investing in each individual corporation (3 answers)?

E. What is the market risk premium in parts c & d?