PROBLEM 1: The returns of Stock A and Stock B have the following distribution:
a) Calculate the Expected Return for Stock A and Stock B
b) Calculate the Variance and the Standard Deviation for Stock A and Stock B
c) Calculate the Coefficient of Variation of each stock
d) Calculate the Correlation Coefficient between Stock A and Stock B
e) In which of the two stocks would you invest your money? Explain.
PROBLEM 2: You have observed the following returns over time:
a) What are the betas of Stocks X, Y and Z?
b) What are the required rates of return for Stocks X, Y and Z?
c) What are the standard deviations for Stocks X, Y and Z?
d) What is the required rate of return and standard deviation for a portfolio consisting of 20% invested in Stock X, 45% invested in Stock Y, and 35% invested in Stock Z?
e) If Stock X’s expected return is 22%, is Stock X under-or-over valued?