lecture07ps - Sauder School of Business COMM 374 Jan-Apr...

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Unformatted text preview: Sauder School of Business COMM 374 Jan-Apr 2010 Finance Division Jan Bena Problem Set 7 - Solution Notes 1. (a) According to the CAPM, investors expect a return of E ( R ) = 5% + 1 . 4 6% = 13 . 4% . (b) The expected return on the security is given by E ( R ) = E ( D 1 ) + ( E ( P 1 )- P ) P , where P is todays price, E ( P 1 ) is next years expected price, and E ( D 1 ) is next years expected dividend. We know that E ( R ) = 13 . 4%, E ( D 1 ) = $0, P = $35. We get E ( P 1 ) = $39 . 69. (c) Now we have E ( D 1 ) = $2. We get E ( P 1 ) = $37 . 69. 2. (a) The statement is FALSE. Suppose that stocks A and B are independent. Then a 50/50 portfolio of A and B has expected return . 5 10% + 0 . 5 12% = 11% and standard deviation p . 5 2 (15%) 2 + 0 . 5 2 (13%) 2 = 9 . 92% . An investor may be willing to hold the 50/50 portfolio, since it has lower standard deviation than both A and B....
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This note was uploaded on 04/17/2011 for the course COMM 299 taught by Professor Desrochers during the Spring '08 term at The University of British Columbia.

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lecture07ps - Sauder School of Business COMM 374 Jan-Apr...

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