CHAPTER 11
MEMBERS:
Phùng Trần Hoàng Trang - 31231026321
Hoàng Kim Thái Hòa - 31231025117
Trịnh Thị Bích Giang - 31231025371
Nguyễn Thị Ngọc Ánh - 31231025450
Phan Thị Bảo Trân - 31231025547
Trần Lê Vy - 31231026044
Nguyễn Mạnh Thảo Nguyên - 31231026077
QUESTION 3:
Stock X: 20%
Stock Y: 45%
Stock Z: 35%
The expected return of 3 stocks are: 10.5%, 16.1%, 12.4%
The expected return of the portfolio?
With: E(rp) = Wx x E(rx) + Wy x E(ry) + Wz x E(rz)
= 20 % x 10 ,5 % + 45 % x 16 , 1 %+35 % x 12 , 4 %=13 , 69 %
QUESTION 4:
$10,000 to invest in a stock portfolio
Stock X: E(rx) = 12,7%
Stock Y: E(ry) = 9,1%
E(rp) = 11.2%
With: E(rp) = Wx x E(rx) + Wy x E(ry)
⇔ 11,2% = Wx x 12,7% + Wy x 9,1% (with Wx + Wy = 1)
⇔ 11,2% = Wx x 12,7% + (1 - Wx) x 9,1%
⇔ 11,2% = Wx x 12,7% + 9,1% - Wx x 9,1%
⇔ 2,1% = Wx x 3,6%
=> Wx = 0,5833 => Wy = 0,4167
Investment Amounts:
Amount in Stock X: 0.5833 × $ 10,000=$ 5,833
Amount in Stock Y: 0.4167 × $ 10,000=$ 4,167
QUESTION 6
E(r) = 0 , 15 x (−0,148 )+ 0 ,30 x 0,031+0 , 45 x 0,162+ 0 ,1 x 0,348=0,0948=9 , 48 %
σ2 =
2 2 2 2
0 , 15 x (−0,148−0,0948) +0 , 30 x (0,031−0,0948) +0 , 45 x (0,162−0,0948) + 0 ,1 x (0,348−0,0948) =0,01851
σ = √ 0,01851=0,1361
QUESTION 9:
a.
Multiply the return of each asset by its portfolio weight
- Boom: Rp = 30 % x 0 , 24+ 40 % x 0 , 45+30 % x 0 ,33=0,351
- Good: Rp = 30 % x 0 , 09+40 % x 0 , 10+30 % x 0 , 15=0,112
- Poor: Rp = 30 % x 0 , 03+40 % x (−0 , 10 ) +30 % x (−0 , 05 )=−0,046
- Bust: Rp = 30 % x (−0 , 05 ) +40 % x (−0 , 25 )+30 % x (−0 , 09 ) =−0,142
The expected return of the portfolio:
E(rp) = 0 , 20 x 0,351+0 ,35 x 0,112+0 , 40 x (−0,046)+0 , 05 x (−0,142)
E(rp) = 0,0839 = 8,39%
b.
σ2 =
2 2 2 2
0 , 20 x ( 0,351−0,0839 ) +0 , 35 x (0,112−0,0839) +0 , 40 x (−0,046−0,0839) +0 , 05 x (−0,142−0,0839) =0,0238
σ = √ 0,0238=0,1544=15 , 44 %
QUESTION 10:
Invested 20% in Stock Q Invested 30% in Stock R
Invested 15% in Stock S Invested 35% in Stock T
β for these four stocks are: 0.75, 1.90, 1.38, 1.16
What is the portfolio β
β p = 20 % x 0 , 75+30 % x 1.90+ 15 % x 1.38+ 35 % x 1.16=1.333
QUESTION 11:
The portfolio consists of:
- A risk-free asset (beta = 0).
- Two stocks: one has a beta of 1.61
The total portfolio is equally risky as the market, meaning the portfolio beta is 1.
The portfolio is equally invested in the risk-free asset and the two stocks, meaning each
component weighs 1/3.
βp = w1 x β1 + w2 x β2 + w3 x β3
⇔ 1 = 3 x 0+ 3 x 1.61+ 3 x β3 ⇔ β3 = 1.39
1 1 1
QUESTION 12:
βi = 1.15, R M = 11.1%, RF = 3.8%
R i = RF + βi x ( R M - RF) = 3.8 % +1.15 x ( 11.1 %−3 , 8 % )=0,122=12 , 2 %
QUESTION 13:
R i = 10,4%, RF = 3.8%, ( R M - RF) = 7%,
R i = RF + βi x ( R M - RF) ⇔ 10 , 4 %=3.8 %+ β i x (7 %) ⇔ β i = 0,94
QUESTION 17:
Asset W: Expected return: 12.3%, βW: 1.2
Risk–free rate: 4%
The portfolio Expected Return: E(Rp)=Ww x E(RW) + (1−WW) x Rf
Portfolio Beta: βp = WW x βW
Percentage of Portfolio in Asset W Portfolio Expected Return Portfolio Beta
0% 0.04 0
25 0.06075 0.3
50 0.0815 0.6
75 0.10225 0.9
100 0.123 1.2
125 0.14375 1.5
150 0.1645 1.8
E( RW )−Rf 12.3 %−4 %
- Slope of the Line: Slope = = =0.0692
βW 1.2
QUESTION 22:
a. Multiply the return of each asset by its portfolio weight
- Boom: Rp = 40 % x 0 , 25+ 40 % x 0 ,35+ 20 % x 0 , 40=0 , 32=32 %
- Normal: Rp = 40 % x 0 , 18+ 40 % x 0 ,13+20 % x 0 , 03=0 ,13=13 %
- Bust: Rp = 40 % x 0 , 03+ 40 % x (−0 ,18 )+ 20 % x (−0 , 45 )=−0 ,15=−15 %
E(rp) = 0 , 25 x 0 , 32+0 , 55 x 0 , 13+0 , 20 x (−0 , 15 ) =0,1215=12 , 15 %
σ2 = 0 , 25 x ( 32 %−12 ,15 % )2 +0 , 55 x ( 13 %−12 ,15 % )2 +0 , 20 x (−15 %−12 ,15 % )2=0,0246
σ = √ 0,0246=0,15694
b. Expected risk premium on the portfolio: E(rp) – Rf = 12,15% - 3,8% = 8,35%
c. If the expected inflation rate is 3.5%
- Approximate Real Return = E(Rp) − Inflation Rate = 12 ,15 %−3.5 %=8.65 %
1+ E (Rp) 1+ 12, 15 %
- Exact Real Return = −1 = −1=0.0836=8.36 %
1+ Inflation Rate 1+3 ,5 %
- Approximate Real Risk Premium = R Approximate Real Return - Rf = 8.65 %−3.8 %=4.85 %
- Exact Real Risk Premium = RExact Real Return - Rf = 8.36 %−3.8 %=4.5 6 %
QUESTION 23:
$ 190,000
WA = =0 ,19
$ 1,000,000
$ 325,000
WB = =0,325
$ 1,000,000
With: β = WA x βA + WB x βB + WC x βC + Wf x βf
⇔ 1 = 0 , 19 x 0 , 83+0,325 x 1, 19+Wc x 1 , 45+W f x 0
⇔ WC = 0,3141724238
the dollar investment in Stock C = WC x $1,000,000 = 0,314 x $1,000,000 = $314172,4138
1 = WA + WB + WC + WRf ⇔ 1=0 ,19+ 0,325+0,3141724238+W Rf ⇔ WRf = 0.171
the dollar investment in the risk-free asset = WRf x $1,000,000 = $171000
QUESTION 24:
Have $100,000 to invest in a Stock X and Y portfolio. Your goal is to construct a portfolio with
an expected return of 12.7%.
Stock X: E(rX) = 11.4%; βX = 1.25
Stock Y: E(rY) = 8.68%; βY = 0.85
E(rp) = Wx x E(rx) + Wy x E(ry) (with Wx + Wy = 1)
⇔ 12.7% = Wx x 11.4% + (1 - Wx) x 8.68%
⇔ Wx = 1.4779 ⇔ Wy = - 0.4779
- Investment in Stock X: WX x $100,000 = 1.4779 x $ 100,000=$ 147790
- Investment in Stock Y: WY x $100,000 = −0.4779 x $ 100,000=−$ 47790
- Portfolio beta: βp = WX x βX + WY x βY
= 1.4779 x 1.25+ (−0,4779 ) x 0.85= 1.44116
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