H8+Portfolio+and+Other+Prprties+of+Exp+Retns - HAAS SCHOOL...

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H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT B ERKELEY UGBA 103 A VINASH V ERMA H OMEWORK 8 : D UE A UGUST 1 2011 1. Suppose you have an investment portfolio of $1,440,000. Seven sixteenths of your portfolio consists of investment in the stock of Coca Cola. The dollar amount invested in risk-free US Treasury securities yielding a certain return of 4.86% is $90000. The remaining amount is allocated between General Electric (GE) and Microsoft (MS) in such a way that the amount invested in Microsoft is five times the amount in General Electric. The probability distribution of the returns on the securities in the portfolio is as follows: EVENT PROBABILITY ~ R CC ~ R GE ~ R MS ~ R P A 0.15 -15% 4.5% 22.5% ? B 0.45 24% 25% 15.3% ? C ? 18% 14.4% 0% ? ( 29 ? ~ = CC R E ( 29 ? ~ = GE R E ( 29 ? ~ = MS R E ( 29 ? ~ = P R E As mentioned in the notes, lower case x ’s are used to denote portfolio weights, which are defined to be the fraction of your wealth invested in a given security. Thus, if Coca Cola is designated as Security 1 , the fact that seven sixteenth of your portfolio is invested in Coca Cola is stated algebraically as x 1 = 7/16 = 0.4375. Calculate the portfolio weights on the other three securities in your portfolio. Also compute the return on the portfolio in each of the three events. Next, calculate the expected return on Coca Cola, on General Electric, on Microsoft, and finally on the entire portfolio. Make sure that your
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This note was uploaded on 09/11/2011 for the course UGBA 103 taught by Professor Berk during the Summer '07 term at Berkeley.

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H8+Portfolio+and+Other+Prprties+of+Exp+Retns - HAAS SCHOOL...

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