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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: & 2 p = w 2 a & 2 p + w 2 b & 2 p + 2 w a w b & a;b Treasury bills are considered risk free, and therefore they have no standard deviation, and no covariance with any other assets. This simpli&es the above equation to: & 2 p = w 2 a & 2 p & 2 p = (0 : 75) 2 (0 : 12) 2 & p = (0 : 75)(0 : 12) & 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 & $100 m $100 m = & : 10 , or & 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 & 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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 Fall '09
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