Homework 7 - BUAD 6200 BUAD 6200 Homework 7 1|Page BUAD 6200 2|Page BUAD 6200 Homework 7 Q1 a E(Rp =(0.14 0.05/2 = 0.095 = 9.5 b = sws awa 0.75 =

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BUAD 6200 BUAD 6200 Homework # 7 11/18/2009 1 | P a g e
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BUAD 6200 Homework 7 Q1) a) E(R p ) = (0.14 + 0.05)/2 = 0.095 = 9.5% b) β = β s w s + β a w a 0.75 = 1.15 w s + 0 × w a w s = .75/1.15 = 0.6522 = 65.22% (weight of stock) w a = 1- 0.6522 = 0.3478 = 34.78% (weight of asset) c) E(R p ) = r s w s + r a w a w a = 1- w s 0.08 = .14 w s + 0.05 (1-w s ) w s = 0.3333 β = β = β s w s + β a w a β = 1.15 × 0.3333 + 0 × 0.6667 = 0.3833 d) β = β s w s + β a w a 2.00 = 1.15 w s + 0 × w a w s = 2.00/1.15 = 1.7391 = 173.91% (weight of stock) w a = 1- 1.7391 = -0.7391 = -73.91% (weight of asset) This means that the firm borrowed money at the risk free rate to buy more stocks. Q2) The expected return for the stocks: E(R a ) = 0.3(-0.02) + 0.5 (0.09) + 0.2(0.17) = 0.073 = 7.3% E(R b ) = 0.3(0.06) + 0.5 (0.07) + 0.2(0.08) = 0.069 = 6.9% The variances standard diviation for the stocks: Var (a) = 0.3 (-0.02-0.073) 2 +0.5 (0.09-0.073) 2 +0.2 (0.17-0.073) 2 = 0.004621 3 | P a g e
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This note was uploaded on 02/09/2010 for the course FINANCE MGT337 taught by Professor Huggins during the Spring '08 term at University of Toronto- Toronto.

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Homework 7 - BUAD 6200 BUAD 6200 Homework 7 1|Page BUAD 6200 2|Page BUAD 6200 Homework 7 Q1 a E(Rp =(0.14 0.05/2 = 0.095 = 9.5 b = sws awa 0.75 =

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