BUSN379 Homework Week 5

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BUSN379 Homework Week 5
You have $10,000 to invest in a stock portfolio.  Your choices are Stock X…

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BUSN379 Homework Week 5

BUSN379 Homework Week 5

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Chapter 11: 4, 7, 17, and 29

Instructions:

  • Please submit your homework using this template.
  • If you used excel for your calculations, please fill in your results in this template and submit along with your Excel sheet.
  • If you used a financial calculator, provide your inputs.
  • If you used an online calculator, provide a snapshot at all possible.
  • If you used a formula, write down your step-by-step calculations.
  • Please complete all items highlighted in yellow.

Note: you will not receive credit for items without calculations

Chapter 11, Exercise #4

Portfolio Expected Return.  You have $10,000 to invest in a stock portfolio.  Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 11 percent.  If your goal is to create a portfolio with an expected return of 12.4 percent, how much money will you invest in Stock X?  In Stock Y?
Here, we are given the expected return of the portfolio and the expected return of each asset in the portfolio, and are asked to find the weight of each asset. Review Section 11.2 and Table 11.5 of your textbook.

We can use the equation for the expected return of a portfolio to solve this problem. Since the total weight of a portfolio must equal 1 (100%), the weight of Stock Y must be one minus the weight of Stock X. Mathematically speaking, this means:

E(Rp) = Expected Return = (Return of X * Weight of X) + Return of Y * (1 – Weight of X)

— We can now solve this equation for the Weight of X…

Exercise #7

Calculating Returns and Standard Deviations.  Based on the following information, calculate the expected return and standard deviation for the two stocks.

State of           Probability of State   Rate of Return if State Occurs

Economy        of Economy                Stock A           Stock B

Recession        .15                               .02                   -.30

Normal            .55                               .10                   .18

Boom              .30                               .15                   .31

  • Calculate the expected return. The expected return of an asset is the sum of the probability of each state occurring times the rate of return if that state occurs…

Exercise #17

Using CAPM.  A stock has a beta of 1.15 and an expected return of 10.4 percent.  A risk-free asset currently earns 3.8 percent.

  1. What is the expected return on a portfolio that is equally invested in the two assets?
  2. If a portfolio of the two assets has a beta of .7, what are the portfolio weights?
  3. If a portfolio of the two assets has an expected return of 9 percent, what is its beta?
  4. If a portfolio of the two assets has a beta of 2.3, what are the portfolio weights?  How do you interpret the weights for the two assets in this case?  Explain

(a) Expected Return. Again, we have a special case where the portfolio is equally weighted, so we can sum the returns of each asset and divide by the number of assets since they are equally invested. The expected return of the portfolio is:…

Exercise #29

SML Suppose you observe the following situation:

 

State of           Probability of             Return if State Occurs

Economy        State                            Stock A           Stock B

Bust                 .10                               -.12                  -.05

Normal                        .65                               .09                   .10

Boom              .25                               .35                   .21

  1. Calculate the expected return on each stock.
  2. Assuming the capital asset pricing model holds and stock A’s beta is greater than stock B’s beta by .25, what is the expected market risk premium?

(a)The expected return of an asset is the sum of the probability of each state occurring

times the rate of return if that state occurs. So, the expected return of each asset is:

Expected Return = (Probability of State 1 * Rate of Return for State 1)+ (Probability of State 2 * Rate of Return for State 2)+ (Probability of State 3 * Rate of…