You are given the following information for returns on two stocks I and Z. I Z 0.04 0.09 1.20 1.50 e 0.25 0.40 Rm = 0.06 and m = 0.20 The returns generating process is assumed to be as follows: R = + Rm + e 2 = 2m 2 + e 2 where R is a random variable representing the return on the stock; Rm is a random variable representing the return on a market index; e is the residual term; 2 , m 2 , and e 2 are the variances of the stock, index and residual term, respectively. The residual terms of the returns generating processes for stocks I and Z are assumed uncorrelated with each other and have a mean of zero. Calculate the following: 1. The mean and variance of the returns of each stock. 2. The covariance of returns between the stocks. 3. The beta of an equally weighted portfolio of the two stocks. 4. The expected return and variance of an equally weighted portfolio of the two stocks. b) You are given the following information for returns on two projects: A 2 = variance of return-on-investment A, with A = 5%. B 2 = variance of return-on-investment B, with B = 20%. wA and wB are weights on project A and B respectively given as 20% and 80% respectively. pA,B = is the correlation between risk levels for A and for B and is given is given as pA,B = 0.00 1. Calculate the combined risk (pooled standard deviation) for the two projects. 2. Interpret your results. You may make use of the following information for this question: P = A 2 +B 2 wB 2 + 2A wA B wB pA,B c) Suppose project A has a total assets value of $1000 with a 10% return on assets and project B is valued at $4000 with 20% return on assets, 1. calculate the return for the combination of projects A and B 2. Interpret your results. You may make use of the following information for this question: rA+B = ROIA + AA AA + AB + ROIB + AB AA + AB d) Suppose the company utilizes only an overdraft facility (of) with an effective cost of 10% and a mortgage loan (mort) with an effective cost of 8% and the respective percentages of the companys total borrowings are 70% and 30%. It is further assumed that the corporate income tax stands at 33%. You are required to calculate cost of this debt. You may use the following this information: kd = [kof pof + kmorf pmorf] (1 t) e) Explain the shortcomings of standard deviation as a measure of risks. f) How are these shortcomings offset by CAPM