PracticeQs_Solutions

# PracticeQs_Solutions - Question 1 (1a) Expected Return: E (...

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Unformatted text preview: Question 1 (1a) Expected Return: E ( R p ) = w a E ( R a ) + w f R f E ( R p ) = (0 : 75)(0 : 14) + (0 : 25)(0 : 08) E ( R p ) = 0 : 105 + 0 : 02 E ( R p ) = : 125 Variance and Standard Deviation: &amp; 2 p = w 2 a &amp; 2 p + w 2 b &amp; 2 p + 2 w a w b &amp; a;b Treasury bills are considered risk free, and therefore they have no standard deviation, and no covariance with any other assets. This simpli&amp;es the above equation to: &amp; 2 p = w 2 a &amp; 2 p &amp; 2 p = (0 : 75) 2 (0 : 12) 2 &amp; p = (0 : 75)(0 : 12) &amp; p = : 09 (1b) The stock portion of the portfolio was devalued to \$60m. The endowment made \$2m in interest and \$3m in dividends, for a total of \$5m. In total, we have: \$25 m + \$60 m + \$5 m = \$90 m We started with \$100 m , so total return is: \$90 m &amp; \$100 m \$100 m = &amp; : 10 , or &amp; 10% (1c) * Assuming* that all interest and income are reinvested in their respective asset classes (interest in bonds, dividends in stocks), we have the following weights: w a = 63 90 = 0 : 7 w f = 1 &amp; w a = 0 : 3 which gives us an expected return of: E ( R p ) = w a E ( R a ) + w f R f E ( R p ) = (0 : 7)(0 : 14) + (0 : 03)(0 : 08) E ( R p ) = : 122 (1d) The University wants an expected return of 12...
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## PracticeQs_Solutions - Question 1 (1a) Expected Return: E (...

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