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# Tutorial Questions SML

Question 1

You own a portfolio that has \$1200 invested in Stock A and \$1900 invested in Stock B. If the
expected returns on these stocks are 11% and 18% respectively, what is the expected return
on the portfolio?

Question 2

Based on the following information, calculate the expected return and standard
deviation of this asset.

## State of Economy Probability of State of Rate of Return if State

Economy Occurs
Recession 0.20 -0.05
Normal 0.50 0.12
Boom 0.30 0.28

Question 3

A stock has an expected return of 13%, the risk free rate is 4% and the market risk
premium is 7% what must the beta of this stock be?
Question 4

A stock has an expected return of 11%, its beta of 0.85 and the risk free rate is 6.5%
what must the expected return on the market be?

Question 5

You are thinking of investing in shares. After doing your research on stock A you
come up with an estimated return of 21.2%. The systematic risk of this stock is 1.15.
If the Treasury Bill yields 5% and the market return is 12%, is this stock a good buy?
(plot the SML and show whether overvalued or undervalued).

## Question 6 (challenge algebra)

You have \$10000 to invest in a stock portfolio. Your choices are Stock X with an expected
return of 14% and Stock Y with an expected return of 9%. If your goal is to create a portfolio
with an expected return of 12.2% how much money will you invest in Stock X and how much
in Stock Y?
Question 7

## Consider the following information:

Rate of Return if State Occurs
State of Probability of Stock A Stock B Stock C
Economy State of Economy
Boom 0.30 0.30 0.45 0.33
Good 0.40 0.12 0.10 0.15
Poor 0.25 0.01 -0.15 -0.05
Bust 0.05 -0.06 -0.30 -0.09
a) Your portfolio is invested 30% each in A and C and 40% in B. What is the
expected return of the portfolio?
b) What is the variance of this portfolio? The standard deviation?

Question 8 (challenge)

A stock has a beta of 1.2 and an expected return of 16%. A risk free asset currently
earns 5%.
a) What is the expected return on a portfolio that is equally invested in the two assets?
b) If we have a second portfolio that is unequally invested in the same two assets,
which has a beta of 0.75, what are the portfolio weights?
c) If we have a third portfolio of the same two assets, which has an expected return of
8%, what are the portfolio weights and its beta?
Question 9

Stock Y has a beta of 1.50 and an expected return of 17%. Stock Z has a beta of 0.80
and an expected return of 10.5%. If the risk free rate is 5.5% and the market risk
premium is 7.5%, which stock is under/overvalued relative to the other?

Question 10

You place 30% of your savings in Asset A and the balance in Asset B. The expected
returns on the two assets are 7% and 12% respectively. The standard deviations are
5% for Asset A and 10% for Asset B. Calculate the expected return of the portfolio.
Calculate the standard deviation of the portfolio if the correlation coefficient between
the two securities is: a) 1.0, b) 0.5, c) 0, and d) -0.5