TUTORIAL Submission date: Coming Monday Must be handwritten

I may ask some of you to solve the problem in the class as well) Question 1 Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.15, E(RB) = 0.25, A = 0.1 and B = 0.2, respectively. (Make use of the formula for calculating the variance between two random variables: 2 2 2 2 2 p w1212 w2 2 2w1w2Cov(r1 , r2 ) w1212 w2 2 2w1w21 2 12 ) a) Calculate the expected return and standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation between the returns on A and B is 0.5. b) Calculate the standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation coefficient between the returns on A and B is -0.5. c) How does the correlation between the returns on A and B affect the standard deviation of the portfolio.

Question 2 a) Is the following statement true or false? Explain. The most important characteristic in determining the variance of a well-diversified portfolio is the variance of each of the individual stocks. b) Briefly explain why the covariance of a security with the rest of well diversified portfolio is a more appropriate measure of the risk of the security than the securitys variance. Question 3 Complete question no. 10, 11 12 ,14, 15 and 16 of Chapter 6, (Bodie Kane)