# (solution) The stock of Business Adventures sells for \$25 a share. Its

The stock of Business Adventures sells for \$25 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: Dividend Stock Price Boom \$1.50 \$35 Normal economy 1.10 30 Recession .55 21 b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury Bills. The return on bills is 3%. 3. A portfolio’s expected return is 12%, its standard deviation is 20%, and the risk-free rate is 4%. Which of the following would make for the greatest increase in the portfolio’s Sharpe ratio? a. An increase of 1% in expected return. b. A decrease of 1% in the risk-free rate c. A decrease of 1% in its standard deviation. 5. The standard deviation of the market-index portfolio is 15%. Stock A has a beta of 2.2 and a residual standard deviation of 25%. a. What would make for a larger increase in the stock’s variance: an increase of .2 in its beta or an increase of 3.84% (from 30% to 33%) in its residual standard deviation? b. An investor who currently holds the market-index portfolio decides to rudce the portfolio allocation to the market index to 90% and to invest 10% in stock A. Which of the changes in (a) will have a greater impact on the portfolio’s standard deviation?