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PS2_Solution

# PS2_Solution - PS2_Solution(1 r...

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PS2_Solution (1) r = (0.1)(-50%) + (0.2)(-5%) + (0.4)(16%) + (0.2)(25%) + (0.1)(60%) = 11.40%. σ 2 = (-50% - 11.40%) 2 (0.1) + (-5% - 11.40%) 2 (0.2) + (16% - 11.40%) 2 (0.4) + (25% - 11.40%) 2 (0.2) + (60% - 11.40%) 2 (0.1) σ 2 = 712.44; σ= 26.69%. CV = 11.40% 26.69% = 2.34. (2) r RF = 5%; RP M = 6%; r M = ? r M = 5% + (6%)1 = 11%. r s when b = 1.2 = ? r s = 5% + 6%(1.2) = 12.2%. (3) a. r A = r RF + (r M - r RF )b A 12% = 5% + (10% - 5%)b A 12% = 5% + 5%(b A ) 7% = 5%(b A ) 1.4 = b A . b. r A = 5% + 5%(b A ) r A = 5% + 5%(2) r A = 15%. (4) a. r i = r RF + (r M - r RF )b i = 9% + (14% - 9%)1.3 = 15.5%. b. 1. r RF increases to 10%: r M increases by 1 percentage point, from 14% to 15%. r i = r RF + (r M - r RF )b i = 10% + (15% - 10%)1.3 = 16.5%. 2. r RF decreases to 8%: r M decreases by 1%, from 14% to 13%. r i = r RF + (r M - r RF )b i = 8% + (13% - 8%)1.3 = 14.5%. c. 1. r M increases to 16%: r i = r RF + (r M - r RF )b i = 9% + (16% - 9%)1.3 = 18.1%. 2. r M decreases to 13%: r i = r RF + (r M - r RF )b i = 9% + (13% - 9%)1.3 = 14.2%. (5) Portfolio beta = \$4,000,000 \$400,000 (1.50) + \$4,000,000 \$600,000 (-0.50)

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PS2_Solution - PS2_Solution(1 r...

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