Question

__Question 1 (20 Marks) Risk & Return [CLO 4]__

- Security A has

an expected return of 7%, a standard deviation of expected returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -0.5. Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation coefficient with the market of 0.7, and a beta coefficient of 1.0.

In a single=asset portfolio, Which security is riskier? Why? **(2 Marks)**

- Stocks A has the following historical returns reported in the sample below:

__Year Stock A (K___{A}__) __

2002 (10%)

2003 18.50%

2004 38.67%

2005 14.33%

2006 33.00%

b) What is the Risk per unit return of Stock A **(7 Marks)**

- ERCI Corporation is a holding company with four main subsidiaries. The percentage of its business coming from each of the subsidiaries, and their respective betas are as follows: (ST-3)

__ SUBSIDIARY % OF BUSINESS BETA______

Electric Utility 60% 0.70

Cable Company 25% 0.90

Real Estate 10% 1.30

International/Special Projects 5% 1.50

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Assume that the risk free rate is 6% and the market premium is 5%. What is the holding company's required rate of return? **(7 marks)**

- If the Treasury bill rate on a Security A is 7% and the return on the market is 10%, the expected Return is 15%; and the security's beta is 0.8. What is the recommended trading Strategy for this Security?
**(4 marks)**

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