FINA2320_ABC_Tutorial 3_Solutions.pdf - Tutorial 3 THE UNIVERSITY OF HONG KONG Faculty of Business and Economics FINA2320_ABC_Investments and Portfolio

FINA2320_ABC_Tutorial 3_Solutions.pdf - Tutorial 3 THE...

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Tutorial 3 Tutorial 3 T HE U NIVERSITY OF H ONG K ONG Faculty of Business and Economics FINA2320_ ABC_ Investments and Portfolio Analysis 1st S EMESTER , 2019-2020 Take-Home Exercise 1 (Scenario Analysis) Purchasing Price of Stock X = $100 T-bill Rate = 4% State of the Year-end Cash Economy Probability Price Dividends Excellent 0.25 126.50 4.50 Good 0.45 110.00 4.00 Poor 0.25 89.75 3.50 Crash 0.05 46.00 2.00 a. What is the expected return of stock X? b. What is the variance and standard deviation of stock X? c. What is the risk premium of stock X?
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Tutorial 3 Tutorial 3 Take-Home Exercise 2 (Time Series Analysis) DJIA Index Fund Period HPR 2001 -0.1189 2002 -0.2210 2003 0.2869 2004 0.1088 2005 0.0491 a. What is the arithmetic average return and geometric average return? g = 0.54% b. What is the variance and standard deviation of the fund return?
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Tutorial 3 Tutorial 3 PROBLEM SET 1 Which of the following choice best completes the following statement? An investor with a higher degree of risk aversion, compared to one with a lower degree, will prefer combined portfolios (assume lending and borrowing at risk-free rate) a. with higher risk premiums. b. that are riskier (with higher standard deviations). c. with lower Sharpe ratios. d. with higher Sharpe ratios. e. None of the above is true. PROBLEM SET 2 IMI uses the capital allocation line to make asset allocation recommendations. IMI derives the following forecasts: Expected return on the risky portfolio: 12% Standard deviation on the risky portfolio: 20% 1-month T-bill rate: 5% Borrowing rate: 7% A client seeks IMI s advice for a portfolio asset allocation and informs IMI that for every $4 he invests in the risky portfolio, he would take out a loan of $2 further to invest. What expected return and standard deviation can IMI provide subject to client s investment constraint?
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Tutorial 3 Tutorial 3 Take-Home Exercise 1 Which of the following statements are true?
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