Total, nondiversifiable, and diversifiable risk David Talbot randomly selected securities from all those listed on the New York Stock Exchange for his portfolio. He began with a single security and added securities one by one until a total of 20 securities were held in the portfolio. After each security was added, David calculated the portfolio standard deviation, $\sigma_{r_p}$. The calculated values are shown in the following table.

Number of securities	Portfolio risk, sigma_(r_(p))	Number of securities	Portfolio risk, sigma_(r_(p))
1	14.50%	11	7.00%
2	13.30	12	6.80
3	12.20	13	6.70
4	11.20	14	6.65
5	10.30	15	6.60
6	9.50	16	6.56
7	8.80	17	6.52
8	8.20	18	6.50
9	7.70	19	6.48
10	7.30	20	6.47

c. Describe which of the two risk components is the relevant risk, and explain why it is relevant. How much of this risk exists in David Talbot's portfolio?

Total, nondiversifiable, and diversifiable risk David Talbot randomly selected securities from all those listed on the New York Stock Exchange for his portfolio. He began with a single security and added securities one by one until a total of 20 securities were held in the portfolio. After each security was added, David calculated the portfolio standard deviation, $\sigma_{r_p}$. The calculated values are shown in the following table.

a. Plot the data from the table above on a graph that has the number of securities on the $x$-axis and the portfolio standard deviation on the $y$-axis.

Total, nondiversifiable, and diversifiable risk: For his portfolio, David Talbot chose random securities from among all those listed on the New York Stock Exchange. He started with one security and gradually added others until the portfolio had a total of 20 stocks. David estimated the portfolio standard deviation,

$$\sigma_{r_p}$$

, after each security was added. The following table displays the calculated values.

$$\begin{array}{cccl} \begin{array}{c} \text { Number of } \\ \text { securities } \end{array} & \begin{array}{c} \text { Portfolio } \\ \text { risk, } \sigma_{r_p} \end{array} & \begin{array}{c} \text { Number of } \\ \text { securities } \end{array} & \begin{array}{c} \text { Portfolio } \\ \text { risk, } \sigma_{r_p} \end{array} \\ \hline 1 & 14.50 \% & 11 & 7.00 \% \\ 2 & 13.30 & 12 & 6.80 \\ 3 & 12.20 & 13 & 6.70 \\ 4 & 11.20 & 14 & 6.65 \\ 5 & 10.30 & 15 & 6.60 \\ 6 & 9.50 & 16 & 6.56 \\ 7 & 8.80 & 17 & 6.52 \\ 8 & 8.20 & 18 & 6.50 \\ 9 & 7.70 & 19 & 6.48 \\ 10 & 7.30 & 20 & 6.47 \end{array}$$

Using this, describe which of the two risk components is the relevant risk, and explain why it is relevant. How much of this risk exists in David Talbot’s portfolio?

You are analyzing the performance of two stocks. The first, shown in Panel A, is Cyclical Industries Incorporated. Cyclical Industries makes machine tools and other heavy equipment, the demand for which rises and falls closely with the overall state of the economy. The second stock, shown in Panel B, is Biotech Cures Corporation. Biotech Cures uses biotechnology to develop new pharmaceutical compounds to treat incurable diseases. Biotech's fortunes are driven largely by the success or failure of its scientists to discover new and effective drugs. Each data point on the graph shows the monthly return on the stock of interest and the monthly return on the overall stock market. The lines drawn through the data points represent the characteristic lines for each security.

Which stock do you think has a higher standard deviation? Why?

Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the common stock of Telmex, a Mexican corporation. He purchased $1,000$ shares at $20.50$ pesos per share. Twelve months later, he sold them at $24.75$ pesos per share. He received no dividends during that time. a. What was Joe's investment return (in percentage terms) for the year, on the basis of the peso value of the shares?

Correlation, risk, and return Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets $\mathrm{V}$ and $\mathrm{W}$ under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative. The expected returns and standard deviations calculated for each of the assets are shown in the following table.

b. If the returns of assets $\mathrm{V}$ and $\mathrm{W}$ are uncorrelated (correlation coefficient $=0$ ), describe the approximate range of (1) expected return and (2) risk associated with all possible portfolio combinations.

Correlation, risk, and return Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets $\mathrm{V}$ and $\mathrm{W}$ under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative. The expected returns and standard deviations calculated for each of the assets are shown in the following table.

c. If the returns of assets $\mathrm{V}$ and $\mathrm{W}$ are perfectly negatively correlated (correlation coefficient $=-1$ ), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations.

Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets $\mathrm{V}$ and $\mathrm{W}$ under three assumed degrees of correlation: perfect positive, uncorrelated, and perfect negative. The expected returns and standard deviations calculated for each of the assets are provided in the accompanying table.

a. If the returns of assets $\mathrm{V}$ and $\mathrm{W}$ are perfectly positively correlated (correlation coefficient $=+1$ ), find the range of (1) expected return and (2) risk associated with all possible portfolio combinations.

Common stock value: Constant growth McCracken Roofing, Inc., common stock paid a dividend of $\$ 1.20$ per share last year. The company expects earnings and dividends to grow at a rate of $5 \%$ per year for the foreseeable future.

b. If McCracken expects both earnings and dividends to grow at an annual rate of $10 \%$, what required rate of return would result in a price per share of $\$ 28$ ?

Common stock value-Constant growth McCracken Roofing, Inc., common stock paid a dividend of $\$ 1.20$ per share last year. The company expects earnings and dividends to grow at a rate of $5 \%$ per year for the foreseeable future. Find the required rate of return for this stock that would result in a price per share of $\$ 28$.

Common stock value: Constant growth McCracken Roofing, Inc., common stock paid a dividend of $\$ 1.20$ per share last year. The company expects earnings and dividends to grow at a rate of $5 \%$ per year for the foreseeable future.

a. What required rate of return for this stock would result in a price per share of $\$ 28$ ?

Correlation, risk, and return: Matt Peters would like to assess the risk and reward. behaviours connected to different asset V and W combinations under three Perfect positive, uncorrelated, and perfect negative correlations are the three levels of expectation. For each asset, the predicted returns and standard deviations were determined. shown in the table below.

$$\begin{array}{ccc} \text { Asset } & \begin{array}{c} \text { Expected } \\ \text { return, } \bar{r} \end{array} & \begin{array}{c} \text { Risk (standard } \\ \text { deviation), } \sigma_r \end{array} \\ \hline \mathrm{V} & 8 \% & 5 \% \\ \mathrm{~W} & 13 & 10 \end{array}$$

Using this, if the returns of assets V and W are uncorrelated (correlation coefficient 0), describe the approximate range of (1) expected return and (2) risk associated with all possible portfolio combinations.

Correlation, risk, and return: Matt Peters would like to assess the risk and reward. behaviours connected to different asset V and W combinations under three Perfect positive, uncorrelated, and perfect negative correlations are the three levels of expectation. For each asset, the predicted returns and standard deviations were determined. shown in the table below.

$$\begin{array}{ccc} \text { Asset } & \begin{array}{c} \text { Expected } \\ \text { return, } \bar{r} \end{array} & \begin{array}{c} \text { Risk (standard } \\ \text { deviation), } \sigma_r \end{array} \\ \hline \mathrm{V} & 8 \% & 5 \% \\ \mathrm{~W} & 13 & 10 \end{array}$$

Using this, if the returns of assets V and W are perfectly negatively correlated (correlation coefficient ), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations.

Portfolio return and standard deviation: Jamie Wong is thinking about constructing an investing portfolio that consists of the equities L and M. Stock M will make up the remaining 60% of the portfolio's value, with stock L accounting for 40% of it. The following table displays the anticipated returns for each of these equities during the subsequent six years, from 2013 to 2018.

$$\begin{array}{cll} \text { Year } & \text { Stock L } & \text { Stock M } \\ \hline 2013 & 14 \% & 20 \% \\ 2014 & 14 & 18 \\ 2015 & 16 & 16 \\ 2016 & 17 & 14 \\ 2017 & 17 & 12 \\ 2018 & 19 & 10 \end{array}$$

Using this, calculate the expected value of portfolio returns, , over the 6-year period.