425.1

1.Stock A has had the following returns over the last 3 years:

1. What is stock A's expected return and standard deviation?

   Its expected return is a simple average of its historical returns: (.10+.16+.19)/3=.15
   Its standard deviation is :

    

2. If the expected return on the market is 12% and the risk-free rate is 3%, what is Stock A's beta?

   Using the CAPM:

   .15=.03+b _a(.12-.03)

   (.15-.03)/(.12-.03) =b _a

   b _a=1.33

3. You are considering putting 50% of your money in A and 50% of your money in either B or C. Which one should you pick and what will the beta of your portfolio be?

You should pick "B" because it has a lower beta and a higher expected return.
The beta of the portfolio will be .5*1.33 + .5*1.2 = 1.265

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