FIN 305 Spring 2019 Homework 2
Note: Turn in page 3 only – Thanks!
Due on February 5th
Use the following information for problems 1 and 2:
Stock A Stock B
Covariance between the stock returns
Problem 1: What is the average rate of return of the portfolio above?
Problem 2: What is the standard deviation of returns for the portfolio described above?
Use the following information for problems 3 through 8: The risk-free rate of return is 4%, the required
rate of return of the market portfolio is 10%. You invest $10,000 in stock A, $15,000 in stock B, $50,000 in
stock C, and $50,000 in stock D. The average returns and standard deviations of the individual stocks are
Ret Standard Dev
Problem 3: What is the average rate of return of the portfolio consisting of these four stocks?
Problem 4: Which stock has the highest amount of stand-alone risk?
Problem 5: What is the beta of your portfolio?
Problem 6: Which stock has the highest amount of systematic risk?
Problem 7: What is the required rate of return of the portfolio?
Problem 8: Assume that you invest another $150,000 in a fifth stock. Stock E has an average rate of return
of 0.18, a standard deviation of returns of 0.22, and a beta of 1.8. What is the new portfolio’s beta?
Problem 9: What is the equilibrium expected rate of return of the new portfolio?
Problem 10: What is the required rate of return of Stock E?
Bonus Problem 1: By combining stocks with ______________ in a portfolio, an investor would get big
High standard deviation of returns
Positive correlation coefficients of stock returns
Negative covariance of stock returns
High beta coefficients
Bonus Problem 2: Which of the following is true?
S1: The stand-alone risk of a stock can completely be diversified away.
S2: According to the Capital Asset Pricing Model (CAPM), the market risk of a stock is relevant.
S1 is true but S2 is false
S2 is true but S1 is false
Both statements are true
Both statements are false
Answer Page for HW 2 FIN 305
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