final+review+questions

final+review+questions - 1. Consider the following...

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1. Consider the following probability distribution for stocks C and D: Compute the coefficient of correlation between C and D. Cov C,D = 0.30(7% - 4.4%)(-9% - 9.5%) + 0.50(11% - 4.4%)(14% - 9.5%) + 0.20(-16% - 4.4%)(26% - 9.5%) = -66.9; ρ A,B = -66.90/[(10.35)(12.93)] = -0.50 2.If you invest 25% of your money in C and 75% in D, what would be your portfolio's expected rate of return and standard deviation? E(R P ) = 0.25(4.4%) + 0.75(9.5%) = 8.225%; s P = [(0.25) 2 (10.35) 2 + (0.75) 2 (12.93) 2 + 2(0.25)(0.75)(10.35)(12.93)( -0.50)] 1/2 = 8.70%. 3. Given an optimal risky portfolio with expected return of 16% and standard deviation of 20% and a risk free rate of 4%, what is the slope of the best feasible CAL? Slope = (16 - 4)/20 = .6 4. The risk-free rate is 7 percent. The expected market rate of return is 15 percent. If you expect a stock with a beta of 1.3 to offer a rate of return of 12 percent, you should A. buy the stock because it is overpriced. B.
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final+review+questions - 1. Consider the following...

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