finance-Currently, CSH Inc. stock has a market price of $20/share and EJH Co.

QUESTION

1.
Currently, CSH Inc. stock has a market price of
$20/share and EJH Co. stock hasa market price of $30/share. You forecast that E[rCSH] = 12% and E[rEJH] =15%.
a.
If you purchase 100 shares of CSH stock and 200
shares of EJH stock, whatare the weights, i.e., wCSHand wEJH, of these stocks in your
portfolio?
b. What is the expected return, E[rp], of yourportfolio?

2.
Briefly explain why you would / should expect
the correlation of the returns fromtwo randomly chosen stocks to bepositive?

3. Is a security with a beta of
0 risk-free? Whyor whynot?

4.
Youareanalyzing
astockthathasabetaof1.2.Therisk-free
rateofreturnis4% andyouestimatethatthemarketriskpremiumis6%.Ifthisstockhasanexpected return
of 11%, would you consider this stock a good investment opportunity? Whyor whynot?

5.
YouforecastthatthenextdividendATAInc.willpaywillbe$1.20/share.Youthen expect dividends to grow at a constant rate
of 3%forever.

If you estimate thatbATA=0.80, the risk-free
rate equals 4%, and the expectedreturnon
themarketportfolio
is10%,whatisthemostyouwouldbewilling
topayforthis stocktoday?

6.
Ifyouconstructaportfoliofromthreestockswiththefollowingweights
andbetas, will your
portfolio have above or below average sensitivity to systematic (i.e.,market) risk? Why? (see page 387 forhelp)

Stock

Weight

Beta

A

25%

1.10

B

30%

0.60

C

45%

0.95

ANSWER:

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