Quiz 2 - FINANCE 100 Corporate Finance Professor Roberts...

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FINANCE 100 Corporate Finance Professor Roberts Solutions to Sample Quiz #2 NAME: SECTION: Question Maximum Student Score Q u e s t i o n 1 5 0 Question 2 50 TOTAL 100 Instructions: ¾ You may bring one 8.5x11 inch sheet of paper to the exam with writing on both sides. ¾ Round all numbers to the 0.01 place. ¾ Show all work, but keep your answers brief. ¾ Please check that the exam contains 5 pages including cover. ¾ Good luck. 1
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Question 1: (50 points) Consider the following information concerning the expected return and standard deviation of two stocks: Expected Return Standard Deviation Stock A 8% 30% Stock B 16% 20% a) Compute the expected return and standard deviation of a portfolio that is 70% invested in stock A (and therefore, 30% invested in stock B) assuming the correlation between the asset returns is –0.3. (20 points) Answer: The expect return on the portfolio, ( ) P R E , is: () 104 0 16 0 30 0 08 0 70 0 . . . . . R E P = × + × = , that is, 10.4%. The variance of the portfolio, V , is: ) ( P R ) ( ( ) ( )( )( )( )( ) 04014 . 0 3 . 0 20 . 0 30 . 0 70 . 0 30 . 0 2 . 0 30 . 0 70 . 0 ) ( 2 2 2 = + + = P R V 20 . 0 30 2 . The standard deviation is therefore by: ( ) 2004 . 0 04014 . 0 = = P R SD , that is, 20.04%. b) What is the standard deviation of the global minimum variance portfolio and what are the corresponding portfolio weights? (20 points)
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Quiz 2 - FINANCE 100 Corporate Finance Professor Roberts...

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