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 Price of Price of stock
Probability
conditions stock X Y
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 Standard
return 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 11% 13%
B 23% 18%
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
7. . 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)