CHAPTER 7 ANSWERS

1. Q1)

(a) and (e) – The other three do not affect all participants in the economy .
2. Q2)
(a)and (c). The portfolio risk (standard deviation) calculation now includes the variance of real
estate returns and correlation between real estate and stocks the correlation between real estate
and bonds. The correlation between real estate and money markets will be zero

Q15)
The standard deviation is 0.458.
First compute the average return. With a probability of 0.7, the return is 100%, and with a probability
of 0.3, the return is 0%. So the average return is 0.7∗1000.7∗100
Next apply the standard deviation formula, the standard deviation
is √ 0.7∗(100%−70%)2+0.3∗(0%−70%)2 =0.458.