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Unformatted text preview: FI 311H- Financial Management - Professor Hadlock Problem Set #4 Due by 5:00 p.m. October 25th Chapter 10 Problems #1. You own a house worth $250,000 and intend to insure it fully against fire for the next year. Suppose the probability of its burning to the ground during the year is .0001 and that an insurance policy covering the full value costs $500. Consider the insurance policy as a security. a. What is the expected holding-period return? b. What is the standard deviation of it HPR c. Would you consider this policy to be a very risky asset? Why or why not? #2. You manage a risky portfolio with an expected return of 17% and a standard deviation of 27%. The T-bill rate is 7%. a. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. What is the expected value and standard deviation of the rate of return of your client's portfolio? b. Suppose that your risky portfolio includes the following investments in given proportions: Stock A: 27% Stock B: 33% Stock C: 40% What are the investment proportions in your client's overall portfolio including the position in T- bills? c. Suppose your client decides to invest in your portfolio a proportion y of the total investment budget so that the overall portfolio will have an expected rate of return of 15%. i. What is the proportion y? ii. What are your client's investment proportions in your three stocks and the T-bill fund? iii. What is the standard deviation of the return on your client's portfolio? d. Suppose that your client prefers to invest in your fund a proportion y that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 20%. i. What is the investment proportion y? ii. What is the expected rate of return on the overall portfolio? #3. You are constructing an investment portfolio. You can invest in American Airlines, Southwest Airlines, and T-bills. The expected return on American is 7% with a standard deviation of 12%. The expected return on Southwest is 13% with standard deviation of 24%. The correlation coefficient between American and Southwest is .2. coefficient between American and Southwest is ....
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- Spring '11