Introduction to Finance HW#4
 (50 points) Complete “Homework #4: 50%” on MyFinanceLab under “Assignments.” Students can try each question up to three times. Excel may be used to solve some of the problems (e.g., you may use Excel to find standard deviation of stock returns.)
 (30 points) Jane Warren is considering building a portfolio containing two assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. The expected returns over the next 6 years, 20122017, for each of these assets, are shown in the following table. (Please use the Excel template posted on Canvas under “AssignmentsàHW4àHW4 Excel Example and Template.” An example can be found in the same Excel document.)
Expected Return  
Year  Asset L  Asset M 
2012  14%  20% 
2013  14  18 
2014  16  16 
2015  17  14 
2016  17  12 
2017  19  10 
 Calculate the expected portfolio return, k_{p}, for each of the 6 years.
 Calculate the expected value of portfolio return, , over the 6year period.
 Calculate the standard deviation of expected portfolio returns, ,over the 6year period.
 How would you characterize the correlation of returns of the two assets L and M?
 Discuss any benefits of diversification achieved through creation of the portfolio.
 (20 points) Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems.

 A stock has a beta of 1.2, the expected return on the market is 14 percent, and the riskfree rate is 5.2 percent. What must the expected return on this stock be?
 A stock has an expected return of 13 percent, the riskfree rate is 4.5 percent, and the market risk premium is 7 percent. What must the beta of this stock be?
 A stock has an expected return of 12 percent, its beta is .70, and the riskfree rate is 5.5 percent. What must the expected return on the market be?
 A stock has an expected return of 15 percent, its beta is 1.45, and the expected return on the market is 12 percent. What must be riskfree rate be?