BA4346 Solution to HW1

# BA4346 Solution to HW1 - 2 =0 Solve the equation we can get...

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HW1 Chapter 2 1 a. The return rate of stock A from t=0 to t=1 is 47.5/45-1= 0.0556 The return rate of stock B from t=0 to t=1 is 22.5/25-1= -0.1 The return rate of stock C from t=0 to t=1 is 110/100-1= 0.1 The rate of return on the price-weighted index: 0.0556*45/(45+25+100)+(-0.1)* 25/(45+25+100)+0.1*100/(45+25+100)=5.88% The rate of return on the value-weighted index : 0.0556*45*100/(45*100+25*200+100*200) +(-0.1)*25*200/(45*100+25*200+100*200) +0.1*100*200/(45*100+25*200+100*200)=5.93% The rate of return on the equally weighted index: 0.0556/3+(-0.1)/3+0.1/3=1.85% b. In the absence of a split, stock C would sell for 110, and the value of the index would be: ( 47.5+ 22.5 + 110)/3 = 60 After the split, stock C sells at 55. Therefore, we need to set the divisor (d) such that: 60 = (47.5+ 22.5 + 55)/d d = 2.0833 Chapter5 2. Mean: 0.35*44.5+0.3*14+0.35*(-16.5)=14 Variance: 0.35*(44.5-14) 2 +0.3*(14-14) 2 +0.35*(-16.5-14) 2 =25.5181 3. -50+(2-53)/(1+IRR)+(54*2+2*2)/(1+IRR)

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Unformatted text preview: 2 =0 Solve the equation, we can get IRR=7.117% 4. E(r P ) = (0.3 × 8%) + (0.7 × 18%) = 15% per year σ P = 0.7 × 28% = 19.6% per year 5. Security Investment Proportions T-Bills 30.0% Stock A 0.7 × 25% = 17.5% Stock B 0.7 × 32% = 22.4% Stock C 0.7 × 43% = 30.1% 6. Your Reward-to-variability ratio = S = 28 8 18-= 0.3571 Client's Reward-to-variability ratio = 6 . 19 8 15-= 0.3571 7. Mean of portfolio = (1 – y)rf + y rP = rf + (rP – rf )y = 8+ 10y If the expected rate of return for the portfolio is 15%, then, solving for y: 16 = 8+ 10y ⇒ y = 10 8 16-= 0.8 Therefore, in order to achieve an expected rate of return of 16%, the client must invest 80% of total funds in the risky portfolio and 20% in T-bills. a. Security Investment Proportions T-Bills 20.0% Stock A 0.8 × 25% = 20.0% Stock B 0.8 × 32% = 25.6% Stock C 0.8 × 43% = 34.4% b. σ P = 0.8 × 28% = 22.4% per year...
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## This note was uploaded on 09/20/2009 for the course BA 4346 taught by Professor Kelseyd.wei during the Spring '09 term at University of Texas at Dallas, Richardson.

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BA4346 Solution to HW1 - 2 =0 Solve the equation we can get...

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