1.

Assume Abebe has bought 100 shares of Awash bank at the beginning of 2020 for 1,000

birr each

Year End of 2020 End of 2021 End of 2021 End of 2022

Dividend received 20,000 0 10,000 30,000

Share price 1,100/share 1,200/share 900/share 1200/share

Compute total return( dividend and capital gain) of each year in birr and in percentage

2. Kate recently invested in real estate with the intention of selling the property one year

from today. She has modeled the returns on that investment based on three economic

scenarios. She believes that if the economy stays healthy, then her investment will

generate a 30 percent return. However, if the economy softens, as predicted, the return

will be 10 percent, while the return will be –25 percent if the economy slips into a

recession. If the probabilities of the healthy, soft, and recessionary states are 0.4, 0.5, and

0.1, respectively, then what are the expected return , risk(standard deviation) and

coefficient of variation for Kate’s investment?

3. The beta of an asset is equal to 0. what will the expected return be?

4. The expected return on the market portfolio is 15 percent, and the return on the risk-free

security is 5 percent. What is the expected return on a portfolio with a beta equal to 0.5?

5. You know that the CAPM predicts that the market return of a stock is 23.6 percent. If the

risk-free rate of return is 8 percent and the expected return on the market is 20 percent,

then what is beta?

6. Elaine has narrowed her investment alternatives to two stocks: Stock M, which has a 23

percent expected return, and Stock Y, which has an 8 percent expected return. If Elaine
 requires a 16 percent return on her total investment, what proportion of her portfolio will

she invest in each stock?

7. Barbara is considering investing in a stock, and is aware that the return on that investment

is particularly sensitive to how the economy is performing. Her analysis suggests that

four states of the economy can affect the return on the investment. Using the table of

returns and probabilities below, find the expected return , the standard deviation and

coefficient of variation of the return on Barbara’s investment.

Probability Return

Boom 0.1 25.00%

Good 0.4 15.00%

Level 0.3 10.00%

Slump 0.2 -5.00%

8. Portfolios with more than one asset: Emmy is analyzing a two-stock portfolio that

consists of a Utility stock and a Commodity stock. She knows that the return on the

Utility has a standard deviation of 40 percent, and the return on the Commodity has a

standard deviation of 30 percent. However, she does not know the exact covariance in the

returns of the two stocks. If she invests 50% in each stock, Compute :

a) expected risk of the portfolio

b) Compute the risk( SD) of the portfolio if covariance of the two stock?

i. 0.12,

ii. 0, and

iii. –0.12

c) Which covariance results in to better pertfolio,why?

9. Given the returns and probabilities for the three possible states listed here, calculate the

covariance , coefficient of correlation between the returns of Stock A and Stock B.

Probability Return(A) Return(B)

Good 0.35 0.30 0.50

OK 0.50 0.10 0.10

Poor 0.15 -0.25 -0.30

10. David is going to purchase two stocks to form the initial holdings in his portfolio. Iron

stock has an expected return of 15 percent, while Copper stock has an expected return of

20 percent. If David plans to invest 30 percent of his funds in Iron and the remainder in

Copper, then what will be the expected return from his portfolio? What if David invests

70 percent of his funds in Iron stock?

11. In order to fund her retirement, Glenda requires a portfolio with an expected return of 12

percent per year over the next 30 years. She has decided to invest in Stocks 1, 2, and 3,

with 25 percent in Stock 1, 50 percent in Stock 2, and 25 percent in Stock 3. If Stocks 1

and 2 have expected returns of 9 percent and 10 percent per year, respectively, then what

is the minimum expected annual return for Stock 3 that will enable Glenda to achieve her

investment requirement?

12. JF Airlines stock is selling at a current price of $37.50 per share. If the stock does not pay

a dividend and has a 12 percent expected return, then what is the expected price of the

stock one year from today?