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?

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?

- Winter '14