I need some guidance in understaning how to complete the following
finance problems. I have a extensive exam quickly approaching and I am
uncertain how to complete the following problems. Could you please
notify me first as to how much it would cost for Google Answers to
anwer all 5 of the following questions? I have never used Google
Answers before, so I just bid $20.00, since these are not intensive
research questions; just math problems.
Thank you for your time!
Mrynot
1. Suppose you have invested $30,000 in the following four stocks.
Security Amount Invested Beta
Stock A $ 5,000 0.75
Stock B 10,000 1.10
Stock C 8,000 1.36
Stock D 7,000 1.88
The risk-free rate is 4 percent and the expected return on the market
portfolio is 15 percent.
Based on the CAPM, what is the expected return on the above portfolio?
2. Suppose a three-factor model is appropriate to describe the
returns of a stock. Information
about those three factors is presented in the following chart. Suppose
this is the only
information you have concerning the factors.
Beta of Expected Actual
Factor Factor Value Value
GNP 0.0042 $4,416 $4,480
Inflation _1.40 3.1% 4.3%
Interest rate _0.67 9.5% 11.8%
a. What is the systematic risk of the stock return?
b. Suppose unexpected bad news about the firm was announced that
dampens the returns
by 2.6 percentage points. What is the unsystematic risk of the stock return?
c. Suppose the expected return of the stock is 9.5 percent. What is
the total return on this
stock?
Return and Risk Statistics
3. Ibbotson and Sinquefield have reported the returns on
small-company stocks and U.S.
Treasury bills for the period 1986?1991 as follo ws.
Small-Company U.S. Treasury
Year Stocks Bills
1986 6.85% 6.16%
1987 _9.30 5.47
1988 22.87 6.35
1989 10.18 8.37
1990 _21.56 7.81
1991 44.63 5.60
a. Calculate the average returns on small-company stocks and U.S. Treasury bills.
b. Calculate the variances and standard deviations of the returns on
small-company stocks
and U.S. Treasury bills.
c. Compare the returns and risks of these two types of securities.
4. You are forming an equally weighted portfolio of stocks. There
are many stocks that all
have the same beta of 0.84 for factor 1 and the same beta of 1.69 for
factor 2. All stocks
also have the same expected return of 11 percent. Assume a two-factor
model describes the
returns on each of these stocks.
a. Write the equation of the returns on your portfolio if you place
only five stocks in it.
b. Write the equation of the returns on your portfolio if you place in
it a very large
number of stocks that all have the same expected returns and the same betas.
5. Suppose the expected return on the market is 13.8 percent and
the risk-free rate is 6.4
percent. Solomon Inc. stock has a beta of 1.2.
a. What is the expected return on the Solomon stock?
b. If the risk-free rate decreases to 3.5 percent, what is the
expected return on the
Solomon stock?
5. a. What spot and forward rates are embedded in the following Treasury bonds? The
price of one-year (zero-coupon) Treasury bills is 93.46 percent.
Assume for simplicity
that bonds make only annual payments. Hint: Can you devise a mixture of long
and short positions in these bonds that gives a cash payoff only in
year 2? In year 3?
Coupon (%) Maturity (years) Price (%)
4 2 94.92
8 3 103.64
b. A three-year bond with a 4 percent coupon is selling at 95.00
percent. Is there a
profit opportunity here? If so, how would you take advantage of it? |
