UGBA103_Pb_Set5-1 - Problem set #5 GSI: Florent Rouxelin 1....

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Problem set #5 GSI: Florent Rouxelin 1. Short Answer Two securities, A and B, have the following expected returns and standard deviations: E[r a ] = .06 σ a = .04 E[r b ] = .08 σ b = .06 If the investor holds combinations of these securities in a portfolio such that he/she expects to earn E [r p ] = .07 while facing σ p = .04, what is the correlation between security A and B? 2. Some relevant data pertaining to three Dow-Jones stocks over the January 1971- December 1975 period are: Stock σ(Ri) βi A ALCOA .093 .662 B Eastman Kodak .070 .979 C Union Carbide .085 1.231 The pairwise correlations between the returns of these three securities are: ρ ab = .137 ρ ac = .476 ρ bc = .422 Using the capital asset pricing model and assuming that E(R m ) = 0.010 per month and R f =.002 per month, calculate the expected return on each stock. Why is E(R B ) > E(R A ) when σ(R A ) > σ(R B )? 3. The following data have been developed for the GlueFast company, a manufacturers of adhesives: State
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This note was uploaded on 09/11/2011 for the course UGBA 103 taught by Professor Berk during the Spring '07 term at University of California, Berkeley.

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UGBA103_Pb_Set5-1 - Problem set #5 GSI: Florent Rouxelin 1....

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