Finance 301 S.I.Monday March 24, 2008Catching Up/Review from Spring Break (Review of material since exam 2)1. If $5000 is invested and $6,255 is retuned after one year, what is the rate of return for this investment?2. What are the two types of risk and which one is most important?3. A stock’s returns have the following distributionDemand for theproductProbability of thedemandRate of Return if thisdemandWeak 0.15 (40%)Below Average 0.22 (7%)Average 0.33 13%Above Average 0.15 28%Strong 0.15 55%a. What is the stock’s expected return?b. What is the stock’s standard deviation?c. What is the stock’s coefficient of variation?4. Define risk aversion and risk premium.5. Use this information for the following question.Security Expected Return RiskA 11.5% 18.9%B 9.4% 14.1%C 8.7% 17.7%D 4.4% 0%E 0.5% 12.8%What is the portfolio’s expected return? 6. What is the main benefit of diversification? When do you realize most of the benefits of diversification? 7. What is the standard deviation for an average stock? Are most stocks positively or negatively correlated with the market?8. Define market risk and diversifiable risk. What is the sum of the
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