1.

Kate recently invested in real estate with the intention oI selling the property one year Irom
today. She has modeled the returns on that investment based on three economic scenarios. She
believes that iI the economy stays healthy, then her investment will generate a 30 return.
However, iI the economy soItens, as predicted, the return will be 10, while the return will be -
25 iI the economy slips into a recession. II the probabilities oI the healthy, soIt and
recessionary states are 0.4, 0.5, and 0.1, respectively, then what are the expected returns and
standard deviation oI the return on Kate`s investment?

2. Jane holds a portIolio oI stocks oI Stex Co. and Racklin with equal investment in each stock.
Given the Iollowing historical inIormation oI the two stocks compute the portIolio return and
risk Ior Jane

Stex Co. Racklin
Dec 31, 2009 10.0 $ 5.0 $
Mar 30, 2010 10.5 4.9
Jun 30, 2010 10.2 6.0
Sep 30, 2010 11.5 5.8
Dec 31, 2010 12.0 5.7


3. Suppose you are looking at Iorming a portIolio oI PIizer stock and Wal-Mart Stock with 60 in
PIizer stock and 40 in Wal-Mart Stock. The historical returns oI the stock are below:

1 2 3 4 5
PIizer 14 8 -16 31 23
Wal-Mart 1 -3 13 19 7

Historically, the correlation oI these two stocks is 0.56. What is the expected return and standard
deviation oI this portIolio?

4. The covariance oI the returns on the two securities, A and B, is -0.0005. The standard deviation
oI A's returns is 4 and the standard deviation oI B's returns is 6. What is the correlation
between the returns oI A and B?

5. Consider Securities D and E with the Iollowing estimates:

E(RD) 8 oD 12 E(RE) 13 oE 20

Now consider the portIolios that can be Iormed with D and E, assuming that the investment is
equal between D and E (that is, each has a weight oI 50). What is the portIolio`s standard
deviation iI the correlation between D and E Ior each oI the Iollowing?
a. 1.0
b. 0.3
c. 0.0
d. -1.0

6. Consider Securities X and Y with the Iollowing estimates: E(RX) 5 oX 10 E(RY) 15

oY 25
II the portIolio is comprise oI 38 X and 62 Y and iI the correlation between the returns on X
and Y is -0.25, what is the portIolio`s expected return and risk?

7. You have a portIolio with a standard deviation oI 30 and an expected return oI 18. You are
considering adding one oI the two stocks in the below table. II aIter adding the stock you will
have 20 oI your money in the new stock and 80 oI your money in your existing portIolio,
which one should you add?

Expected
return
Standard
Deviation
Correlation with your
portIolio`s return
Stock A 15 25 0.2
Stock B 15 20 0.6