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Part II Question 1: You invest in a portfolio of 5 stocks with an equal investment...

Part II

Question 1: You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .8, -1.3, .95, 1.2 and 1.4. The risk-free return is 3% and the market return is 7%.

  1. Compute the beta of the portfolio.
  2. Compute the required return of the portfolio.

Question 2: You are given the following probability distribution for a stock:

Probability       Outcome            

       .5                     -6%

       .5                    18%

  1. A) Compute the expected return.
  2. B) Compute the standard deviation.
  3. C) Compute the coefficient of variation.

Part III

Question 1: What is the rationale for the positive correlation between risk and expected return?

Question 2: Why is it possible to eliminate unsystematic risk in a well-diversified portfolio? Likewise, why is it not possible to eliminate systematic risk?

Part II

Question 1: You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .8, -1.3, .95, 1.2 and 1.4. The risk-free return is 3% and the market return is 7%.

  1. Compute the beta of the portfolio.
  2. Compute the required return of the portfolio.

Question 2: You are given the following probability distribution for a stock:

Probability       Outcome            

       .5                     -6%

       .5                    18%

  1. A) Compute the expected return.
  2. B) Compute the standard deviation.
  3. C) Compute the coefficient of variation.

Part III

Question 1: What is the rationale for the positive correlation between risk and expected return?

Question 2: Why is it possible to eliminate unsystematic risk in a well-diversified portfolio? Likewise, why is it not possible to eliminate systematic risk?

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