FIN 301 Fall 2010 HW4

# FIN 301 Fall 2010 HW4 - FIN 301 Fall 2010 Homework...

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FIN 301 Fall 2010 Homework Assignments Homework 4 (Due by 4:00pm on December 6 Monday) 1 Problem 1 You want to create a portfolio which is as risky as the market. You have \$80,000 to invest and you have already invested \$28,000 in Stock X and \$20,000 in Stock Y (your investment choices are limited to the assets listed in the Table 3). Fill in the rest of the table (i.e. calculate a, b, c and d): Amount invested Beta Stock X \$28,000 0.5 Stock Y \$20,000 1.5 Stock Z (a) 1.2 Risk-Free Asset (b) (c) Total \$80,000 (d) Problem 2 You are given the following information about stocks A and B: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Boom 0.2 20% 25% Normal 0.6 10% 12% Recession 0.2 -5% -6% Stock A has a beta of 1 and stock B has a beta of 1.4. Assuming that neither of these stocks are over- or undervalued, what is the market risk premium and the risk-free rate? Problem 3 Stock Name Price Today Expected Price in 1 year Expected Dividend In 1 year Stock Beta A \$32.00 \$33.00 \$2.00 0.70 B \$40.00 \$46.00 \$0.00 1.75 C \$60.00 \$65.00 \$1.00 1.20 The risk-free rate is 4.5% and the expected return on the market is 10.5%. Assume investors want to buy

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FIN 301 Fall 2010 HW4 - FIN 301 Fall 2010 Homework...

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