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