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\( 30 \% \)
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3. Consider Table 5. Each part of question 3 carry equal marks.
\begin{tabular}{|l|c|c|c|c|c|}
\hline \multicolumn{5}{|c|}{ Table 5 } \\
\hline & Period 1 & Period 2 & Period 3 & Period 4 & Period 5 \\
\hline Stock 1 returns & \( 8 \% \) & \( 6 \% \) & \( 6 \% \) & \( 7 \% \) & \( 8 \% \) \\
\hline Stock 2 returns & \( 1 \% \) & \( 1 \% \) & \( 2 \% \) & \( 3 \% \) & \( 4 \% \) \\
\hline Market returns & \( 6 \% \) & \( 5 \% \) & \( 3 \% \) & \( 9 \% \) & \( 8 \% \) \\
\hline
\end{tabular}
(a) Calculate equity beta and alpha for stocks 1 and 2 . Using the single index model, calculate systematic risk and unsystematic risk for stocks 1 and 2. Also using the single index model, calculate the covariance and correlation between the returns on stock 1 and stock 2. Detail all calculations.
(b) Form an equally-weighted portfolio of stocks 1 and 2. Using the single index model, what is the expected return and standard deviation risk of this portfolio? Detail all calculations.
(c) Form a portfolio of stocks 1 and 2. Solve for the composition of the minimum variance portfolio comprising of stocks 1 and 2 . Sketch the minimum variance frontier, and show where the minimum variance portfolio and the equally-weighted portfolio are located. Detail all calculations.
(d) Consider Tables 5 and 6 . Suppose there is a third risky-asset whose alpha, beta, and residual variance are presented in Table 6. Form an equally-weighted portfolio of stock 1, stock 2, and stock 3. Using the single index model, what is the expected return and standard deviation risk of this portfolio? Detail all calculations.
\begin{tabular}{|l|c|c|c|}
\hline \multicolumn{4}{|c|}{ Table 6 } \\
\hline Stock 3 & Alpha & Beta & Residual Variance \\
\hline
\end{tabular}
2022-FN305-January.pdf
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