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Correlations
X and Y	X and Z	Z and Y
0.5	0.2	0.9

Stocks	Mean Return	Variance of Return
X	2	2.25
Y	4	36
Z	6	4
Stocks	Mean Return	Variance of Return
X	2	2.25
Y	4	36
Z	6	4
Stocks	Mean Return	Variance of Return
X	2	2.25
Y	4	36
Z	6	4
Stocks	Mean Return	Variance of Return
X	2	2.25
Y	4	36
Z	6	4

Solve the following questions using the data given below

v

Other Betas

HML

SMB

X

0.3

1

Y

0.4

1.2

Z

0.5

0.7

Risk Premiums

RF

2%

Market

7%

HML

3%

SMB

9%

1-) Portfolio 1 : X (40%) and Y (60%)

a-) Find the Standard Deviation and the Expected Return of the portfolio

Fill the following variance covariance matrix (just the numbers up to 2 decimal points)

X

Y

X

Y

portfolio

stdev

mean

b-) Find the market, HML, and SMB betas of the portfolio.

market

HML

SMB

BETA

c-) What are the required rate of returns of the portfolio based on CAPM and FF3 factor models, respectively.

CAPM

FFF3

return

2-) Portfolio 2 : X (30%) - Y (40%) - Z (30%)

a-) Find the Standard Deviation and the Expected Return of the portfolio

Fill the following variance covariance matrix (just the numbers up to 2 decimal points)

X

Y

Z

X

Y

Z

portfolio

stdev

mean

b-) Find the market, HML, and SMB betas of the portfolio.

market

HML

SMB

BETA

c-) What are the required rate of returns of the portfolio based on CAPM and FF3 factor models, respectively.

CAPM

FFF3

return

3-)

What are required rate of returns on X, Y, Z based on CAPM and FF3 factor models?

CAPM

FFF3

X

Y

Z

Using the average returns as expected returns, determine whether X,Y,Z are overvalued, undervalued, fairly priced based on CAPM model.

Overvalued

Undervalued

Fair Price

X

Y

Z

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