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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?
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