ICE Comm 303 Suggested Solutions to Chapters 5 and 6 Problem

ICE Comm 303 Suggested Solutions to Chapters 5 and 6...

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Answers to problems in Chapters 5 and 6 5-7. The dollar return per share on the investment would be the sum of the $3 ($48 - $45) capital gain and the $2 dividend, which totals $5 per share. The percentage return per share equals 11.1% as determined below by substituting the given values into Equation 5.1. % 1 . 11 45 $ 2 $ 45 $ 48 $ = + - = return Until the stock is sold you only have a ‘paper’ return, not a realized return. 5-21. Sell the grocery stock and take a loss for tax purposes, then buy a stock that is highly correlated with the stock you sold. 5-22. a. Portfolio Variance = (56.10%*36%) 2 + (43.90%*46%) 2 + 2*56.10%*43.90%*(- 1.0)*36%*46% = 0.00 b. Portfolio Variance = (460%*36%) 2 + ((-360%)*46%) 2 + 2*460%*(- 360%)*1.0*36%*46% = 0.00 c. Yes, all of the portfolio risk can be eliminated under perfect correlation assuming short selling is possible. The calculations in Part B demonstrate this to be true.
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Unformatted text preview: d. Yes, portfolio risk can be eliminated if short selling is not possible, assuming there is perfect negative correlation. The calculations in Part A demonstrate this to be so. 6-14. According to CAPM: ) ) ( ( f m f i R R E R R-+ = 10.2% = R f + 1.2 x 6% R f = 3% E(R m) R f = 6%, so E(R m ) = 9% 6-17. Weight in risk-free security = $6,000.00 ($6,000.00 + $4,000.00) = 60% Weight in market portfolio = $4,000.00 ($6,000.00 + $4,000.00) = 40% Expected portfolio return = 60%*6% + 40%*10% = 7.6% CAPM beta = (7.6% - 6%) (10% - 6%) = 0.40 Notice, the CAPM beta is equal to the portfolio weight invested in the market portfolio. 6-24. E(R) = R f + 1 (R 1-R f ) + 2 (R 2-R f ) + 3 (R 3-R f ) Market GDP Oil = 3% + (1 x 6%) + (.5 x 5%) + (2 x 4%) = 19.5%...
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This note was uploaded on 03/18/2008 for the course ICE 303 taught by Professor Roberts during the Spring '08 term at UVA.

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