Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow.
   % Return on T-Bills, Stocks and Market Index
       State of the Economy
Recession Below Average Average Above Average Boom
Probability T- B ills
0.2 7 0.1 7 0.3 7 0.3 7 0.1 7
Phillips
-22 -2
Pay- Rubber- up made
28 10 14.7 -10
Market Inde x
-13 1
                     20 0 7 15 35 -10 45 29 50 -20 30 43
                Mean
                   Standard Deviation
           Coefficient of Variation
      Covariance with MP
                Correlation with Market Index
             Beta
                CAPM Req. Return
          Valuation (Overvalued/Undervalued/Fairly Valued)
       Nature of stock (Aggressive/Defensive)
                Question 1 (18 marks)
Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items. Each line item is worth 2 marks

Question 2 (8 marks)
Using the data generated in the previous question (Question 1);
RELEASED BY THE CC, MGMT2023, SEMESTER 1, 2022 2

a) Plot the Security Market Line (SML)
b) Superimpose the CAPM’s required return on the SML
c) Indicate which investments will plot on, above and below the SML?
d) If an investment’s expected return (mean return) does not plot on the SML, what does
it show? Identify undervalued/overvalued investments from the graph (2 marks)

Question 3 (4 marks)
From the information generated in the previous two questions;
a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50-
50 investment allocation in each investment alternative
b) Compute the expected return of the portfolio thus formed
c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?
(1 mark) (1 mark) (2 marks)

Barney Smith Investment Advisors recently issued estimates forthe state of the economy and the rate of return on each state ofthe economy. Alta Industries, Inc. is an electronics firm; Repo MenInc. collects past due debts; and American Foam manufacturesmattresses and various other foam products. Barney Smith alsomaintains an "index fund" which owns a market-weighted fraction ofall publicly traded stocks; you can invest in that fund and thusobtain average stock market results. Given the situation asdescribed, answer the following questions.

a. Calculate the expected rate of return on eachalternative.

b. Calculate the standard deviation of returns on eachalternative.

c. Calculate the coefficient of variation on eachalternative.

d. Calculate the beta on each alternative.

e. Do the SD, CV, and beta produce the same risk ranking? Why orwhy not?

f. Suppose you create a two-stock portfolio by investing $50,000in Alta Industries and $50,000 in Repo Men. Calculate the expectedreturn, standard deviation, coefficient of variation, and beta forthis portfolio. How does the risk of this two-stock portfoliocompare with the risk of the individual

Assume you have created a 2-stock portfolio by investing $30,000 in stock X with a beta of 0.8, and $70,000 in stock Y with a beta of 1.2. Market risk premium is 8% and risk-free rate is 6%.The followings are the probability distributions of Stocks X and Y’s future returns:

State of Economy Probability r_x r_y

Recession 0.1 -10% -35%

Below average 0.2 2% 0

Average 0.4 12% 20%

Above average 0.2 20% 25%

Boom 0.1 38% 45%

What is the return you require to earn on your portfolio?

What is the return you expect to earn on your portfolio?

Calculate the standard deviation of your portfolio's return

Do you hold any under-valued stock in your portfolio? Explain.

Question 1-1

Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -1.5. Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0. Which security is riskier? Why?

Problem 1-2

Assume the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?

Problem 1-3

Suppose r_RF = 5% r_M = 10%, and r_A = 12%

Calculate stock A’s beta.

If stock A’s beta were 2.0, then what would be A’s new required rate of return?

Please forgive me, I posted the first part of this question (the main body) but forgot to post the rest of the question. So here is the full question. Thank you.