Discuss the below:
1 Suppose there is a third security ©, with these characteristics: E(Rc) = 10%; Ï?2=0.20; Pac=0.78; and Pbc = 0.56. Construct the quadratic program that would minimize the risk of a three-security portfolio consisting of A, B, and C.
2 A two-security portfolio contains Stocks B and C from above table. Using a spreadsheet package, do the following:
| Year |
Stocks |
| |
A |
B |
C |
D |
E |
| 1998 |
0.200 |
0.300 |
0.100 |
0.000 |
-0.100 |
| 1999 |
-0.100 |
0.000 |
0.000 |
0.100 |
0.200 |
| 2000 |
0.400 |
0.500 |
0.100 |
0.400 |
0.300 |
| 2001 |
0.100 |
0.200 |
0.300 |
-0.100 |
0.000 |
| 2002 |
2.000 |
0.300 |
0.300 |
-0.200 |
0.200 |
| 2003 |
-0.200 |
-0.200 |
-0.100 |
0.100 |
0.400 |
| 2004 |
0.500 |
0.500 |
0.000 |
0.300 |
0.300 |
| 2005 |
-0.100 |
0.100 |
0.200 |
0.300 |
-0.100 |
| 2006 |
0.000 |
-0.100 |
0.200 |
0.100 |
-0.200 |
| 2007 |
0.300 |
0.400 |
0.300 |
0.100 |
0.000 |
| E(R~) |
0.130 |
0.200 |
0.140 |
0.110 |
0.100 |
| σ |
0.219 |
0.232 |
0.136 |
0.176 |
0.195 |
a. Prepare a plot showing the portfolio variance for various combinations of Stocks B and C.
b. Find the minimum variance portfolio.
c. Find the proportions of Stocks B and C that constitute a portfolio with the same risk as Stock C alone.
3 "Consider the following information:
Stock price = $46.69
Current dividend = 1.98
Future dividend growth rate = 5.5%
Beta = 1.10
30-day T-bill rate = 2.55%
Equity risk premium = 8.2%
For this stock you want to set a buy limit at 90% of the intrinsic value of the stock as determined using the dividend discount model. What should that price be?"