&quot;Problems_1_solutions

# &quot;Problems_1 - MGMT41100 B-H Hwang Spring 2010 Practice Problems#1 Solutions 1 Toyota stock has the following probability distribution of

This preview shows pages 1–2. Sign up to view the full content.

MGMT41100 – B.-H. Hwang – Spring 2010 Practice Problems #1 - Solutions 1. Toyota stock has the following probability distribution of expected prices one year from now: a) If you buy Toyota today for \$55 and it will pay a dividend during the year of \$4 per share, what is your expected return on Toyota? Answer: E(r) = .25 (50-55+4)/55 + .40 (60-55+4)/55 + .35 (70-55+4)/55 = 18.18%. b) What is the standard deviation for Toyota stock? Answer: σ = [.25 (((50-55+4)/55) – 0.1818) 2 + .40 (((60-55+4)/55) – 0.1818) 2 + .35 (((70-55+4)/55) – 0.1818) 2 ] 1/2 = 14% 2. Stock A’s expected return and standard deviation are E[r A ] = 8% and σ A = 15%, while stock B’s expected return and standard deviation are E[r B ] = 12% and σ B = 21%. a. Determine the expected return and standard deviation of the return on a portfolio with weights w A =.35 and w B =.65 for the following alternative values of correlation between A and B: p AB =0.6 and p AB = -0.4. Answer: E[r P ] = ω A E[r A ] + ω B E[r B ] = 0.35(0.08)+0.65(0.12) = 0.106 regardless of the correlation. Using σ ωσ ωωρ σσ =++ 2 22 2 p A A B B A B AB A B , for ρ AB =0.6: σ p 2 = (.35) 2 (.15) 2 +(.65) 2 (.21) 2 +2(.35)(.65)(0.6)(.15)(.21) = 0.029988 or, σ p = 17.32% For ρ AB =-0.4: σ p 2 = (.35) 2 (.15) 2 +(.65) 2 (.21)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 04/09/2011 for the course MGMT 411 taught by Professor Clarke during the Winter '09 term at Purdue University-West Lafayette.

### Page1 / 2

&quot;Problems_1 - MGMT41100 B-H Hwang Spring 2010 Practice Problems#1 Solutions 1 Toyota stock has the following probability distribution of

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online