1.

An investor is considering to invest in stock and bond in the following table:

a. Expected return and standard deviation of the stock and bond.

b. Expected return and standard deviation of the risky portfolio P:
+ 60% in stock and 40% bonds.
+ 100% invest in Stocks
+ 100% invest in Bonds
2. Price in 2013 of stock X, Y and Z are $54, $32 and 45 respectively. A financial
analyst of ABC Security Company forecasts the price of stock X,Y and Z after 1
year as following:
Period X Y Z
2014 52 30 40
2015 58 39 45
2016 55 32 47
2017 53 37 44
2018 64 39 49

a. What are expected return and standard deviation of the three stocks.
b. Should investor combine stock X and Y to form a portfolio
c. What are expected return and standard deviation of the risky portfolio P which
invests 60% in stock X and 40% in stock Y.
d. How much should investor invest in risky portfolio P in order to construct an
optimized complete portfolio, given risk-free rate is 6% and A = 3.
e. What are expected return and standard deviation of optimized complete
portfolio?
f. Which portfolio should be invested if investor is considering between portfolio 1
(20% in stock X and 80% in stock Y) and portfolio 2 (50% in stock X and 50% in
stock Z)

3. Current price of stock X and Y are $54 and $32 respectively. A financial analyst
of ABC Security Company forecasts the price of stock X and Y after 1 year as
following:
Economic
Probability Price of stock X Price of stock Y
conditions
Bad 0.2 42 27
OK 0.4 58 35
Good 0.4 65 40

a. What are expected return and standard deviation of the two stocks.
b. What are expected return and standard deviation of the risky portfolio P which
invests 60% in stock X and 40% in stock Y.
c. How much should investor invest in risky portfolio P in order to construct an
optimized complete portfolio, given risk-free rate is 6% and A = 3.
d. What are expected return and standard deviation of optimized complete
portfolio?
4. Stock A, B, C and D have expected return and standard deviation respectively as
follow
Stock Expected return Standard deviation
A 7% 0%
B 11% 7%
C 19% 14%
D 20% 30%

a) Which stock a risk- neutral investor is most likely to choose ?

b) Which stock a risk- seeking investor is most likely to choose, given that his
risk aversion has a value of A= 2
c) Calculate the return and standard deviation of the portfolio which invest
45% in stock B and the remainding in stock C, given that the correlation of
stock B and C is 0.5
d) Which stock should be invested if the investor is considering stock C and
stock .

5. An investor is considering adding a risk-free asset with a return of 3% into his

risky portfolio. The expected return and standard deviation of the risky
portfolio is 7% and 15%. His risk aversion value is 2
a) Calculate the optimal proportion invested in risk-free asset
b) Write an equation for the capital allocation line that will connect the risk-
free asset to the portfolio of risky assets
c) What is the standard deviation of the new portfolio that gives a 9% return
and is on the capital allocation line?
6. Stock A and B have expected return and standard deviation respectively as
follow
Stock Expected return Standard deviation
A 10% 16%
B 15% 23%
Correlation between A and B = 0.45
Risk-free rate = 4%

a) Which portfolio should be invested if investor is considering between Risky

portfolio 1 (30% in stock A and 70% in stock B) and portfolio 2 (25% in
stock A and 75% in stock B)
b) If Investor add a risk-free asset C with a return of 5% into the risky portfolio
that was choosed in part (a) to form a complete portfolio. What should the
optimal proportions of risky portfolio and risk-free asset for an investor
whose degree of risk aversion is 3.
c) Calculate the expected return and standard deviation of the complete
portfolio