MD Corporation has po rtfolio investment opportunity.

It has 3 investments in the portfolio composed of Stock A, B

and C. MD Corp. The following informations are available:
Economic State Probability Rate of return
Stock A Stock B Stock C.
Boom 40% 30% 15% 20%
Normal 40% 20% 10% 15%
Recession 20% 5% -10% -5%

The Stock A comprises the 40% of the portfolio, Stock B and C Comprise 30% each in the portfolio.
Compute the following:
1. Expected Return of the Portfolio
2. Variance
3. Portfolio Standard Deviation

Risk Free Rate = 10%

Market Rate of return = 15%
Beta = 1.2
4. Compute the market premium
5. Compute the Risk Premium
6. Compute the required rate of return

Risk Free Rate = 10%

Market Rate of return = 15%
Assuming there are 3 investments in the portfolio. Information related to the Beta Coefficient:
Investment 1 = beta 1.2
Investment 2 = beta .9
Investment 3 = beta 1.5
Assuming Investment 1 is 30% of the total portfolio, Investment 2 is 50% and investment 3 is 20% of the portfolio.
7. Compute the Portfolio beta
8. Compute the Market Premium
9. Compute the Risk Premium
10. Compute the Inflation Premium
11. Compute the Required return of the portfolio

MCQs

1. In a 5-year period, the annual returns on an investment are 5%, -3%, -4%, 2% and 6%. The standard deviation of
annual returns on this investment is closest to
a. 4% b. 4.5%. c. 20.7% d. 4.75%

2. A portfolio was created by investing 25% of the funds in Assets A (standard deviation =15%) and the balance of
funds in Asset B (standard deviation = 10%).
a. If the correlation coefficient is .075, what is the portfolio’s standard deviation?
a. 10.6%. b. 12.4% c. 15% d. 14%

b.If the correlation coefficient is -0.75, what is the portfolio standard deviation?
a. 2.8% b. 4.2% c. 5.3%. d. 5.2%

3. According to CAPM, what is the expected rate of return for stock with a beta of 1.2 when the risk free rate is 6%
and the market return is 12%?
a. 7.2% b. 12% c. 13.2%. d. 13.1%

4. According to CAPM, what is the required rate of return for a stock with a beta of 0.7, when the risk-free rate is 7%
and the expected market rate of return is 14%?
a. 11.9%. b. 14% c. 16.8% d. 14.5%