Course ID: FINANCE Finance Author's Note: Course ID: FINANCE 1 Question 1:.3 a. Expected return and standard deviation of Stratum Corp. and Quamed Inc

Running head: FINANCE
Finance
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1FINANCE
Table of Contents
Question 1:.......................................................................................................................................3
a. Calculating expected return of Stratum Corp. and Quamed Inc:.................................................3
b. Calculating the standard deviation of Stratum Corp. and Quamed Inc:......................................3
c. Calculating the covariance and the coefficient of correlation between Stratum Corp. and
Quamed Inc:.....................................................................................................................................3
d. Calculating the expected return and the standard deviation of the risky portfolio:.....................4
e. Explaining the nature and purpose of the Sharpe ratio, and how it applies to i) portfolios and ii)
individual stocks.:............................................................................................................................4
f. Calculating the Sharpe ratio of the risky portfolio:......................................................................5
gi . Defining about an investor’s degree of risk aversion:...............................................................5
gii. Defining about a portfolio’s price of risk:.................................................................................5
giii. Briefly explaining how the two can be used together to arrive at a preferred capital
allocation:........................................................................................................................................6
h. Calculating a client’s degree of risk aversion if their corresponding preferred capital allocation
is equal to 90%:...............................................................................................................................6
Question 2:.......................................................................................................................................7
a. Explaining an efficient frontier is in the context of a mean-variance framework, while
discussing about the minimum variance and the optimal portfolio significance:...........................7
b. Computing the expected return and the standard deviation of a portfolio:.................................8
c. Drawing investment opportunity set with stocks and bonds:......................................................8
d. Computing the expected return and standard deviation of the minimum variance portfolio:.....9
ei. Drawing the tangency Capital Allocation Line (CAL), and identifying the optimal portfolio:. 9

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eii. Computing the expected return and standard deviation of the optimal portfolio:...................10
eiii. Calculating the reward-to-volatility ratio of the optimal CAL line:.......................................10
f. Calculating the standard deviation of the total portfolio:...........................................................10
gi. Clearly explaining about the asset class dominating another:..................................................11
gii. Discussing the validity and appropriateness of including gold in the efficient frontier:.........11
References and Bibliography:........................................................................................................12

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Question 1:
a. Calculating expected return of Stratum Corp. and Quamed Inc:
A B C D E F
State of
Economy
Probabi
lity
Stratum
Corp.
Expected return
(S) (BxC)
Quamed
Inc.
Expected return
(Q) (BxE)
Boom 40.00% 35.00% 14.00% 6.00% 2.400%
Recession 15.00% -20.00% -3.00% -12.00% -1.800%
Normal 45.00% 12.00% 5.40% 25.00% 11.250%
Expected
return 16.40% 11.85%
b. Calculating the standard deviation of Stratum Corp. and Quamed Inc:
A B C D E F G H I J
State of
Economy
Prob
abilit
y
Stratu
m
Corp.
Derv-
Exp R
(S)
Sqr
Der
v
Value
(BxE)
Quam
ed Inc.
Derv-
Exp R
(Q)
Sqr
Der
v
Value
(BxI)
Boom
40.00
% 35.00% 18.60%
3.46
% 1.38% 6.00% -5.85%
0.34
% 0.14%
Recession
15.00
%
-
20.00% -36.40%
13.2
5% 1.99%
-
12.00
% -23.85%
5.69
% 0.85%
Normal
45.00
% 12.00% -4.40%
0.19
% 0.09%
25.00
% 13.15%
1.73
% 0.78%
Variance 3.46%
1.77
%
Standard
Deviation
18.60
%
13.30
%