Problem set 4

# Problem set 4 - Expected return Standard deviation Stock...

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BNFN 416 Investment Management Problem set 4 (Reference chapter 6) Q1) A three-asset portfolio has the following characteristics: Asset Expected Return Standard deviation Weight X 15% 22% 0.50 Y 10 8 0.40 Z 6 3 0.10 a) What is the expected return on three-asset portfolio? Q2) Suppose that the returns on the stock fund as follows: State of the Economy Probability ROR Recession 0.3 -14% Normal Growth 0.4 13 Boom 0.3 30 a) Compute the mean and variance of the stock fund? b) Calculate the covariance between the stock and bond funds using the figures as follows: stock funds are the values deviation from mean return and bond funds are 10;0;-10 respectively. Q3) A pension fund manager is considering three mutual funds such as a stock fund, a long-term government and corporate bond fund, and a T-bill money market fund 1

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that yields a sure rate of 5.5%. The probability distributions of the risky funds as follows: (note: The correlation between the fund return is 0.15).
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Unformatted text preview: Expected return Standard deviation Stock fund (S) 15% 32% Bond fund (B) 9 23 a) Tabulate and draw the investment opportunity set of the two risky funds. b) Use investment proportions for the stock fund of 0 to 100% in increments of 20%. c) What expected return and the standard deviation does your graph show for the minimum variance portfolio? d) Draw a tangent from the risk-free rate to the opportunity set e) What is the reward-to-variability ratio of the best feasible CAL? f) What is the standard deviation of your portfolio if it yields an expected return of 12%? g) What is the proportion invested in the T-bill fund and each of the two risky funds? Q4) The rate of return for six month for Generic Risk Inc as follows. Month Market Return Generic Return 1 0% +2% 2 3-1 4-1-2 5 +1 +4 6 +1 +2 What is Generics beta? (Hint: find the answer by plotting the scatter diagram). 2...
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## This note was uploaded on 10/28/2009 for the course MBA MBA608 taught by Professor Martin during the Spring '09 term at Beirut Arab University.

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Problem set 4 - Expected return Standard deviation Stock...

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