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5. Assume N securities. The expected returns on all the securities are equal to 0.01 and the variances of their returns are all equal to 0.01. The covariances of the returns between two securities are all equal to 0.005. i. What are the expected return and the variance of the return on an equally weighted portfolio of all N securities? Please, note that the variance is presented by the formula, which depends on N.

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Emmy is analyzing a two-stock portfolio that consists of a utility stock and a commodity stock. She knows that the return on the utility stock has a standard deviation of 40 percent and the return on the commodity stock has a standard deviation of 30 percent. However, she does not know the exact covariance in the returns of the two stocks. Emmy would like to plot the variance of the portfolio for each of three cases—covariance of 0.060, 0, and –0.060—in order to understand what the variance of the portfolio would be for a range of covariances. Do the calculation for all three cases (0.060, 0, and -0.060), assuming an equal proportion of each stock in the portfolio. Case 1, σ1,2 = 0.060: variance= ? Case 2, σ1,2 = 0.0 variance= ? Case 3, σ1,2 = -0.060: variance= ?

The standard deviation of portfolio A’s returns for the coming year is 3%. The standard deviation of portfolio B’s returns for the coming year is 7%. Portfolio A has an expected return of 12%, while Portfolio B’s expected return is 15%. If Portfolio A is less risky, why would an investor select Portfolio B?

a.

Two-thirds of the time, Portfolio A has an expected return range of between 9% to 15%.
b.

Two-thirds of the time, Portfolio B has an expected return range of between 8% to 22%.
c.

Two-thirds of the time, the higher risk of Portfolio B is offset by a comparable expected return range on the low side, and a superior expected return range on the high side.
d.

Given the data, an investor would not reasonably consider investing in Portfolio B.

The Russian securities market plummeted at the news that Western Europe and the United States threatened economic sanctions against Russia in retaliation for its occupation of the Crimea. The risk to securities that is affected by news of this sort is termed what?

a.

Systematic risk.
b.

Unsystematic risk.
c.

Diversifiable risk.
d.

Nondiversifiable risk.
e.

Both (a) and (d).
f.

Both (b) and (c).

If CAPM is valid, which of the following situations are possible? Explain. Consider each situation independently. Hint: recall that the CAPM has implications for expected returns, correlations, covariances and variances.

a) Portfolio A - Expected Return =20, Beta=1.4

Portfolio B - Expected Return =25, Beta=1.2

b) Portfolio A - Expected Return =30, SD=35

Portfolio B - Expected Return =45, SD=25

c) Portfolio Rf - Expected Return =10, SD=0

Portfolio Market - Expected Return =18, SD=24

Portfolio A - Expected Return=16, SD=12

d) Portfolio Rf - Expected Return =10, SD=0

Portfolio Market - Expected Return =18, SD=24

Portfolio A - Expected Return=20, SD=22

e) Portfolio Rf - E(r)=10, Beta=0

Portfolio Market - E(r)=18, Beta=1

Portfolio A - E(r)=16, Beta=1.5

f) Portfolio Rf - E(r)=10, Beta=0

Portfolio Market - E(r)=18, Beta=1

Portfolio A - E(r)=16, Beta=0.9

Please show me all the work, let me know what i need to do to solve this problem. I have no idea how to attack this problem

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