3330%20PS5 - Cornell University Fall 2009 Economics 3330:...

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Cornell University Fall 2009 Economics 3330: Problem Set 5 Due 10/26/09 1. Question 5 of Chapter 8 of Text A portfolio management organization analyzes 60 stocks and constructs a mean-variance efficient portfolio using only those 60 securities. a. How many estimates of expected return, variances, and covariances are needed to optimize this portfolio? b. If one could safely assume that stock market returns closely resemble a single-index structure, how many estimates would be needed? 2. Question 6 of Chapter 8 of Text The following are estimates for two stocks. Stock Expected Return Beta Firm-Specific Std. Dev. A 13% .8 30% B 18 1.2 40 The market index has a standard deviation of 22% and the risk-free rate is 8%. a. What are the standard deviations of stocks A and B? b. Suppose that we were to construct a portfolio with the following proportions: Stock A 0.30, Stock B 0.45, T-bills 0.25. Compute the expected return, standard deviation, beta, and nonsystematic standard deviation of the portfolio. 3. Question 4 of Chapter 9 of Text You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash flows (in millions of dollars). There is an immediate cost of 40
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This note was uploaded on 12/22/2009 for the course ECON 3330 taught by Professor Mbiekop during the Fall '08 term at Cornell University (Engineering School).

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3330%20PS5 - Cornell University Fall 2009 Economics 3330:...

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