Posted: September 21st, 2016

You are considering three stocks with the following expected dividend yields and capital gains: DIVIDEND YIELD CAPITAL GAIN A 14% 0% B 8% 6% C 0 14%

1) You are considering three stocks with the following expected dividend yields and capital gains:
DIVIDEND YIELD CAPITAL GAIN
A 14% 0%
B 8% 6%
C 0 14%
A) What is the expected return on each stock?
B) How many transactions costs and capital gains taxes affect your choices among the three securities?

3. You are given the following information concerning two stocks:
A B
Expected Return 10% 14%
Standard deviation of the expected return 3.0% 5.0%
Correlation coefficient of the returns -.1%

a) What is the expected return on a portfolio consisting of 40 percent in stock A and 60 percent in stock B?
b) What is the standard deviation of this portfolio?
c) Discuss the risk and return associated with investing (a) all your funds in stock A, (b) all your funds in stock B, and (c) 40 percent in A and 60 percent in B. (This answer must use the numerical information in your answers derived above.)

5. What is the beta of a portfolio consisting of one share of each of the following stocks given their respective prices and beta coefficients?
Stock Price Beta
A $10 1.4
B $24 0.8
C $41 1.3
D $19 1.8
How would the portfolio beta differ if (a) the investor purchased 200 shares of stocks B and C for every 100 shares of A and D and (b) equal dollar amounts were invested in each stock?

6. What is the return on a stock according to the security market line if the risk-free rate is 6 percent, the return on the market is 10 percent, and the stock’s beta is 1.5? If the beta had been 2.0, what would be the return? Is this higher return consistent with the portfolio theory?