Question 1:
The stock of Business Adventures sells for $40 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:
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|
Dividend
|
Stock Price
|
|
Boom
|
$2.00
|
$50
|
|
Normal economy
|
1.00
|
43
|
|
Recession
|
0.50
|
34
|
a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely.
b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 4%.For Problems 12-16, assume that you manage a risky portfolio with an expected rate of return 0 and a standard deviation of 27%. The T-bill rate is 7%.
Question 2:
Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. (LO 5-3)
a. What is the expected return and standard deviation of your client's portfolio?
b. Suppose your rislcy portfolio includes the following investments in the given proportions:
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Stock A
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27%
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|
Stock B
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33%
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|
Stock C
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40%
|
What are the investment proportions of your client's overall pordolio, including the position in T-bills?
c. What is the Sharpe ratio (8) of your risky portfolio and your client's overall portfolio?
d. Draw the CAL of your portfolio on an expected return/standard deviation diagram. What is the slone of the CAL? Show the position of your client on your fund's CAL.