Week 6 - Problem 1 (there are 5 problems)
10.6 Suppose the expected returns and standard deviations of stocks A
and B are E(RA) = 0.17,
E(RB) = 0.27, StdDevA = 0.12, and StdDevB = 0.21, respectively.
a. Calculate the expected return and standard deviation of a portfolio
that is composed of
35 percent A and 65 percent B when the correlation between the returns
on A and B is 0.6.
b. Calculate the standard deviation of a portfolio that is composed of
35 percent A and
65 percent B when the correlation coefficient between the returns on A
and B is -0.6.
c. How does the correlation between the returns on A and B affect the
standard deviation
of the portfolio?
Week 6 - problem 2
Suppose the expected return on the market portfolio is 14.7 percent
and the risk-free rate is 4.9 percent.
Morrow Inc.stock has a beta of 1.3 Assume the
capital-asset-pricing model holds.
a. What is the expected return on Morrow?s stock?
b. If the risk-free rate decreases to 3.7 percent, what is the
expected return on Morrow?s
stock?
Week 6 - Problem 3
A portfolio that combines the risk-free asset and the market portfolio
has an expected return
of 22 percent and a standard deviation of 5 percent. The risk-free
rate is 4.9 percent, and
the expected return on the market portfolio is 19 percent. Assume the
capital-asset-pricing
model holds.
What expected rate of return would a security earn if it had a 0.6 correlation
with the market portfolio and a standard deviation of 3 percent?
Week 6 - problem 4
Suppose you have invested $50,000 in the following four stocks:
Security Amount Invested Beta
Stock A $10,000 0.7
Stock B 15,000 1.2
Stock C 12,000 1.4
Stock D 13,000 1.9
The risk-free rate is 5 percent and the expected return on the
market portfolio is 18 percent.
Based on the capital-asset-pricing model, what is the expected return
on the above
portfolio?
Week 6 - Problem 5
You enter into a forward contract to buy a 10 -year, zero-coupon
bond that will be issued in
one year.The face value of the bond is $1,000 , and the
1 -year and 11 -year spot interest rates
are 4 percent per annum and 9 percent per annum, respectively. Both
of these interest rates
are expressed as effective annual yields (EAYs).
a. What is the forward price of your contract?
b. Suppose both the spot rates unexpectedly shift downward by
1 percent.
What is the price of a forward contract otherwise identical to yours? |
