Chap5_solution - Suggested Solutions to Selected Problems...

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Suggested Solutions to Selected Problems Chap 5 Fin 367 Spring 2008 Professor Bing Han Chapter 5: 4. E(r) = [0.3 × 44%] + [0.4 × 14%] + [0.3 × (–16%)] = 14% σ 2 = [0.3 × (44 – 14) 2 ] +[0 .4 × (14 – 14) 2 ] + [0.3 × (–16 – 14) 2 ] = 540 σ = 23.24% The mean is unchanged, but the standard deviation has increased. 5. a. The holding period returns for the three scenarios are: Boom: (50 – 40 + 2)/40 = 0.30 = 30.00% Normal: (43 – 40 + 1)/40 = 0.10 = 10.00% Recession: (34 – 40 + 0.50)/40 = –0.1375 = –13.75% E(HPR) = [(1/3) × 30%] + [(1/3) × 10%] + [(1/3) × (–13.75%)] = 8.75% σ 2 (HPR) = [(1/3) × (30 – 8.75) 2 ] + [(1/3) × (10 – 8.75) 2 ] + [(1/3) × (– 13.75 – 8.75) 2 ] = 319.79 σ = 79 . 319 = 17.88% b. E(r) = (0.5 × 8.75%) + (0.5 × 4%) = 6.375%. σ = 0.5 × 17.88% = 8.94%
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19. a. E(r P ) = (0.3 × 7%) + (0.7 × 17%) = 14% per year σ P = 0.7 × 27% = 18.9% per year b. Securit
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This note was uploaded on 05/10/2008 for the course FIN 367 taught by Professor Han during the Spring '08 term at University of Texas.

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Chap5_solution - Suggested Solutions to Selected Problems...

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