Please answer the following 8 questions. Attached is a PowerPoint presentation that you MUST use for the answers.

1. How do you calculate stand-alone expected return?

2. How to you calculate stand-alone risk?

3. You are going to create a portfolio of two different stocks (50 percent of each in the portfolio). Why can’t you usually take the weighted average of the two individual stock’s standard deviations to calculate the portfolio risk?

4. Why does the average 2-stock portfolio give you the same expected return as the average 1-stock portfolio?

5. Why does the average 2-stock portfolio give you lower risk than the average 1-stock portfolio? (don’t use coin flip example in your answer)

6. Why are there diminishing returns to diversification? That is, as you add more stocks, the marginal benefits go down. Why?

7. How did we calculate beta of McDonald’s? Explain in detail.

Question 8 use the following information: Assume there are 2 portfolios. Portfolio A holds just McDonalds and has a beta of 1.1. Portfolio B holds 100 different stocks and has a beta of 1.1.

8. Draw the scatterplots of the two portfolios relative to the Standard and Poor’s 500.

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