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Question 1
1.
Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very
little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk
would be even lower if he were more diversified. You obtain the following returns data for West
Coast Bank (WCB). Both banks have had less variability than most other stocks over the past 5
years. Measured by the standard deviation of returns, by how much would your uncle's risk have
been reduced if he had held a portfolio consisting of 47% in ECB and the remainder in WCB?
(Hint: Use the sample standard deviation formula.)
Year
ECB
WCB
2007
40.00%
40.00%
2008
10.00%
15.00%
2009
35.00%
5.00%
2010
5.00%
10.00%
2011
15.00%
35.00%
Average return =
15.00%
15.00%
Standard deviation =
22.64%
22.64%
Answer
3.64%
3.16%
4.36%
4.00%
3.24%
10 points
Question 2
1.
Stock A's stock has a beta of 1.30, and its required return is 13.25%. Stock B's beta is 0.80. If
the riskfree rate is 2.75%, what is the required rate of return on B's stock? (Hint: First find the
market risk premium.)
Answer
7.00%
9.21%
8.84%
11.15%
9.30%
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This note was uploaded on 02/27/2012 for the course FIN FIN3403 taught by Professor C.kalogeras during the Fall '09 term at FIU.
 Fall '09
 C.KALOGERAS

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