E. Suppose you created a two-stock portfolio by investing $50,000 in High Tech and $50,000 in…

E. Suppose you created a two-stock portfolio by investing $50,000 in High Tech and $50,000 in Collections.

(1) Calculate the expected return (rp), the standard deviation (?p), and the coefficient of variation (CVp) for this portfolio and fill in the appropriate rows in the table.

(2) How does the riskiness of this two-stock portfolio compare to the riskiness of the individual stocks if they were held in isolation?

F. Suppose an investor starts with a portfolio consisting of one randomly selected stock. What would happen (1) to the riskiness and (2) to the expected return of the portfolio as more randomly selected stocks are added to the portfolio?

G. The expected rates of return and the beta coefficients of the alternatives as supplied by the bank’s computer program are as follows:

Security, Return (r), Risk (B)

High Tech, 17.4%, 1.29

Market, 15.0%, 1.00

U.S. Rubber, 13.8%, 0.68

T-Bills, 8.0%, 0.00

Collections, 1.7%, -0.86

(1) What is a beta coefficient, and how are betas used in risk analysis?

(2) Do the expected returns appear to be related to each alternative’s market risk?

H. (1) For the same information in the chart in part g, write out the Security Market Line equation, use it to calculate the required rate of return on each alternative, and then graph the relationship between the expected and required rates of return.

(2) How do the expected rates of return compare with the required rates of return?

(3) Does the fact that Collections has a negative beta coefficient make any sense? What is the implication of the negative beta?

(4) What would be the market risk and the required return of a 50-50 portfolio of High Tech and Collections? Of a 50-50 portfolio of High Tech and U.S. Rubber?

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