7211TutAnswersWk5_109

7211TutAnswersWk5_109 - 7211afe Tutorial Suggested Answers...

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7211afe Tutorial Suggested Answers for Week 5 Question 1 Suppose a stock had an initial price of $64 per share, paid a dividend of $1.75 per share during the year, and had an ending share price of $72. Compute the percentage total return. What was the dividend yield? The capital gains yield? Solution: 15.23% or 1523 . 64 75 . 9 64 ) 64 75 . 1 72 ( ) ( 1 1 = = - + = - + = - - t t t t t P P D P k 2.73% or 0273 . 64 75 . 1 . 1 = = = - t t P D yld div 12.5% or 125 . 64 8 64 ) 64 72 ( ) ( . . 1 1 = = - = - = - - t t t P P P yld gain cap Question 2 You own a portfolio that has $1200 invested in Stock A and $1900 invested in Stock B. What are the portfolio weights? If the expected returns on these stocks are 11% and 16% respectively, what is the expected return on the portfolio? Solution: First we need to calculate the weight of each asset in the portfolio. The total value of the portfolio is: Total value = $1,200 + 1,900 = $3,100 w A = 1200/3100 = 0.39 w B = 1900/3100 = 0.61 The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset: A k = 11% B k = 16% B B A A p k w k w k + = p k = (0.39)(0.11) + (0.61)(0.16) = .1406 or 14.06%
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Question 3 An investor wishes to construct a portfolio consisting of Security “A” and “B”. The expected returns on the two assets are A k = 0.05 and B k = 0.09. The standard deviations are 0.03 and 0.07 for security “A” and “B” respectively. The correlation coefficient is +0.3. If the weight is 0.2 for security “A”, calculate the expected return and standard
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This note was uploaded on 10/10/2010 for the course ECON 7300 at University of Sydney.

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7211TutAnswersWk5_109 - 7211afe Tutorial Suggested Answers...

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