Question 1:
You invest 30% in Ham and 70% in Cheese.
|
Time
|
Ham
|
Cheese
|
|
1
|
-.04
|
.11
|
|
2
|
.15
|
.41
|
|
3
|
.21
|
-.13
|
|
4
|
.18
|
.39
|
Find the return and variance on the portfolio. You must calculate: expected return for both firms; standard deviation or variance (assume it is a population (n observations)) for both firms; correlation or covariance between Ham and Cheese.
Question 2:
Suppose stock returns can be explained by the following three factor model:
Ri = RF + β1F1 + β2F2 - β3F3
Assume there is no firm-specific risk. The information for each stock is presented here:
|
|
β1
|
β2
|
β3
|
|
Stock A
|
1.45
|
.80
|
.05
|
|
Stock B
|
.73
|
1.25
|
-.20
|
The risk premiums for the factors are 5.3 percent, 3.9 percent, and 4.2 percent, respectively. If you create a portfolio with 60 percent invested in stock A and the remainder in stock B, and the risk-free rate is 2 percent, what is the expected return of your portfolio?