DOC - I L QUESTION] (22 points) fl ’3 tie/V Cg ’ :...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

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

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

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

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

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

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: I L QUESTION] (22 points) fl ’3 tie/V Cg ’ : 3('0\ ' You have the following single indeé flTfegression information on two securities: Securi A Security B ] ( { at” A g 'f I (X B )7 "‘ " W 0“ “‘l I 1 RA=1%+2Rm+eA 'RB=-l%+1RM+eB J O'CE Residual standard deviation = 0.20 i Residual stande deviation = 0.40 l R—squa e = 0.90 : F A few mg a) What is the variance of Security A? (3 points) pi: QA’Gul 46“; 4034*: 3‘19 (mH- 0.036 — ________ = 0‘4 c u . 35961114 G‘(€A» %M‘+o.z‘ 0t4-GM -0056 074": 0.0‘] a 67:5 emu We»: 1‘10.04)+ on‘: 0.4 v GM: M b) What is the systematic variance of Security A? (3 points) Gama“: fume): 0.36 c) What is the variancc of the market index? (3 points) GM 1: Olofi L.“ d) What is the variance of Security B? (3 points) = How) + 0.43 = 0‘13 e) What is the covariance between Securities A and B? (3 points) gaVLEA.Rn)=fi~u<p6‘M*: (2)0)(0‘04): (MB "V" i) What is the correlation between Securities A and B? (3 points) twain P a \ 9' “a ‘ €A9=é® 8=__D__‘B____;*—{_::—~:jo,5‘6q A 5 Oil g) What is the covariance between Security A and the market index? (2 points) CUVMMQM): 39346;“: (.17: ; $06)); 0J8 [1/ h) What is the R-square of the regression of Security B on the market index? (2 points) "‘ 4 0'7“ 2 _- R=‘—:—‘~- =oae'~~ (3‘8 OJJ; PageZ ’z- 1 Fina‘I_Morning 2 L ,_ a. a L. .1 >' Tognd'fii‘vq:lglfia of 5 ’6',“ ‘1" 0? (e, R12 ‘ I c . ‘»._ QUESTION 2 (20 points) ' Assume that the returns of secuties in the economy areflfiven b ources of risk (systematic factors). The risk-free rate is The [able below provides information on these-three factors and the betas of two well diversified portfolio 9». n @with respect to these factors. _ ELM-— (‘9 Factor Expected Rate Actual Rate [3; -' [3Q _ __ of Change of Chan e i___fi__J' I Industrial production I a 2% 3% i 1.2 0.6 ' “30‘4" ! Inflation ! 6% 4% .' 0.6 033‘ i M9413, O ; Oilprices 3% ___ 2% | 1.4 0.7 l / 9" a) What should the exgected return of portfolio P be if this portfolio is fairly; priced? (4 points) ‘ EU’pl: H + FP,PP1* FREE. -‘ firing = ‘i’z’z+'.2 -‘,- --’-a‘ Mr" '4” 19/0 I“ I b) What is the unexpected return of portfolio P if its idiosyncratic return is O? (4 points) AF! 4'GP34\F§ cm --.. Mme/M— ll(3~13 +0.6tq.~—t‘,\* :-.--.. J.” .3 ,_P__H:f&‘: _S-J. .. _ ‘ l c) Portfolio Q has an expected return 0 7.1%. What is Portfolio Q’s alpha? Is Portfolio Q over- or under-priced? ' (4 points) Requnrpd Emu = H‘" 8MP: + 69$?” mars: 4% +0th v/u+~o.ax w. + 9.; yaw/o 6m»); 8x €ch W'hlm sat-,4 n:- l- . . , ouev fined '. d) What if: the arbitrage strategy hat canbgituploimi'shiiiigpi’iéing? =saline the stegs and show what the arbitrage profits are given the actual returns of the factors given above. @wints) at a» la. 3 1/0 2 Tcolrzed _. w P ifat‘rf/ —- ph‘ceri Q3 Weir - (Jvrmoi El atrium-032 19??“me arbTer-aae SW13” 1 1. guy P and 5‘5." an gem“ (ln-cmnf-q-f—G 1. 1-3079) + (3F 5F. + gphaF1+gP§DF3 H ‘w. .v 3) = 84-9/0 mars-M q\I&/o+ 0.6 gig) + o.‘>,é£L-m+o’a 0.3”]. :drbi‘fiflae profrt F inal_Moming _ QUESTION3 (20 points) raj.» " - Suppose you are looking at your pension savings and compare your actual performance to that of a benchmark mutual fund portfolio you could have invested in. The information on your performance and that of the benchmark are ided below g mural” 4. . . 1 Stocks I 15% 0.6 jl 0.4 ‘ 12% I I .' T | Corporatebonds II 10%_ 1 _ 0.3 J, 0.4 L _ _8%_ l I. 1‘ I Treasuries 5% J1 0.1 M 0.2 5% I The performance attribution formula is given by: , ----------------- -m+4 -------- use; ------- ——. a) Break your relative outperformance/underperl'ormance into the individual components due to asset allocation and smn for each asset class? (12 points) Show your calculations then fill in the table below. . 9“ Asset allomh‘on I tl/Jpa - um a; 4 If a 1’- ’xoxé — datum/o 1— (OJ—bra.) x853 -r (st—UJMS‘VO : 24—" otsw mg: lx|9/0 l 2: 0.6 (IPA—um +~ 0.3(i0‘l.*b.‘«‘ 1* Galfi'fi "a," .- = “i” 0‘6: 2.49/0 Amer 803% ~‘ 0.4-kb). v. +0i‘l-s: 8v «ratz 1r '5 .: Clo/o , \_, 3‘??? Wevpé'y'j-um-om‘e < p 7 0\6X|'f%+OI%X'O’/u +— D‘: , a) ,1”: '2‘; D/J / git/51rd TOTAL OUTPERFRMAN_CE ' _ 3,5, 9.1-0.1 agar: # Total from Stocks ___fi fi _'_I_‘ota_l_ from corporatgggygsn; __Total fr_om Treasuries __ ________ 1Z;.__._. ._. _ ___:'_°_'2-__ ____._'_%__ Asset Security Asset Security Asset Security ‘ Allocation _ Selection Allocation , Selection Allocation Selection , liq-D/o_ l¢8‘/0 ——O\Qo!, 0.60/3 —Olsola 00/0 b) What is your overall performance due to asset allocation? (3 points) 1-. i - i 0/ o c) What is your overall performance due to security selection? (3 points) 2 r 4" 0/0 l d) What is your conclusion, i.e. should you focus your efforts more on asset allocation or secgritygelggtion? (2 points) 4e UAW-57 {elf Ci-Ton Page 4 Final_Morning QUESTION 4 (18 points) ' .f’s- , V I r x. . ‘ A semi-annual bond has a 12% annual coupon rate, a face value 331,000, and 1.5 years to maturity. The bond is selling at a semi—annual yield~to—mat_u1:ity of 5%. ’ ’ I i ifl—w—f‘*fl*.“4 5" . a) You just bought this bond. What is the price that you paid? (5 points) I __ / FM lfioo _/Q q” 3 PV= $0251.15 - ' fMT 60 RI 5 -/, b) What is effective annual yield of the bond? (3 points) k'l.05)“'—} = \otzsefo c) Suppose that six months have passed and you have just collected the semi-annual coupon on the bond. This morning you also sold the bond. Note that a week ago, Moody’s upgraded the bond and the market now requires a semi—annual yield to maturity of only 4%. What was your semi-annual holding-period return. (lOpoints) -- \ \' ‘ [:V LOGO m 1 WT 60 in": “‘7‘” 'i 4% loa¥.?l~rox?.rb Smw annual mama Parcel WWW : H. .———. (011L335 = 0/9”” 1 Oh ' 3L 3/0 Q J? ' Page 5 F inaLMornmg QUESTION 5 (20 points) - i . , ‘ You are provided with the following information on 1,2, and 3-year zero-coupon bonds: -————-——- y'—-—‘-_—-m_'—-——T Year II| Price of ' Spot One year . ‘ Zero-Coupon Bond 1 Rates Forward Rates 1 i $952.38 1 (13' HQ I___ 2 3' $873.44 ie‘ '1 ® I 3 $711.78 9 . a) Calculate the spot rates for maturities 1,2, and 3, then fill in the table above? (5 points) r.-. L000 (3: Man“ 2 452.35 $5 305 0» '5~'/.- ® l 000 ,________. Hg ‘1 = 33’4’4 ammo“ : an? a» 4m luv 3 (a) ...______.. r- . __ . . ,, RH ufla i “9'8 ‘33” '3‘ 3‘ "r *0 a 1)) Calculate the one-year forward rates for years 1,2, and 3, then fill in the table above? (5 points) @ g °/o @ «stow: <-+otow>< w» 4.1; “"2” '"l r 0.06} a). cw» l a 09 © {-4- 0‘1;)3 ==- (-‘+0.0=};\ 4 'ia) 193:: ‘l ,,‘ ._.I. 0.127. 0» 11.? °/= . 'z 23 c) Ifthe pure expectation hypothesis is correct, what price does the market expect that the price of l, . a twgfleag zero coupon bond (face of $1,000) will be one year from now? (5 points) t r ts l . 00x.) ~. were. 43 I \ 0 d) If the pure expectation hypothesis is correct, what does the market expect that the price of a two-year 10% annual coupon bond (face of $1,000) will be one year from now? (5 points) \ i001 = $‘lé‘6 6 Page 6 F inal_Morning .4: , QUESTION 3 (30 points) ,- _ I. a...- ' You collect the following information on two securities and the market: Expected Standard Correlation return Deviation with market . M O SecuntyA 73% 40% 0.25 Security B 9.3% 35% 0.40 Market ? 20% 1.0 .\ . ,,, ’3- — r a) Whatarethebetaspftheftwo SeczrliltiesAfndB? (6points) L1 '02:) :' R4; 7' Ukfi'“ ¥ / 2 _ than " [h Ediigfi __ EQLCA; —— V . , _ I (,_., , 1*” " 3333;;- «1 - K r is” x i > r: #729 at. " ’1‘ )1 47'5’51720L I J ,3 A? l. 72,52,15495‘2141 wild”; £57.43 g: [xx-7.5. Km “((5 f rt wingwr ’lsifhas‘kz k .. ' .? 9' /'.ef9’_3_gm> /%;_; T“ c’: e 9'75 17% (Km + “17.33;” +’1.____..’“m@:v> 0. F4}: b) If both Securities A and B are priced correctly according to the CAPM (in equilibrium), calculate the expected return of the Market and the risk-free rate. (6 points) (“mm-73° {flea-fat 1 ft IERA: is 5981613 0 7.5: rg + 0.3(RM_r;)“‘@ ' q'5: n; + 0»? CRM"£')'_@ @ 4,? ;. ofiQR’Mwb I.- QMw-‘Ze: q “0 7.8: filt- OrS L4,) 1.8: C + q'rs :9; @qui-SCET’E c) If Security C has an expected return 9 and a beta of 1.5, is it over- or under~priced? (41718) 1.4: ‘:"_. :‘Qf—zk'g'rt’ ’79" “"147- / ' ) —: (XC :IIAS " Eff, ‘t 4v5(RM‘;‘$)3 0<_¢-' “as— [:3 + asides) -- O “a; 45-, £3 .+ 43.821 6 [M45254 . Ii Paco i‘ (1) Eric is a portfolio In aer managing «$500,000 }quity portfolio with a beta oi»- d an expected return 0 He holds $10,000 of security®(described above) in his portfolio. He decides to sell all of his holdings of security A and invest all the $10,000 in security C (described in c)). What will the new beta of his overall portfolio be afier this transaction? (10 pts) 0 fig; 49.4 66: 4'4 Two: 9:39:00 40,000 Pt 89.“ 3K 40,900 C 80‘ 0.8 :33; =*a= I "n," Egg—L"— @%:o,09 *8: = . l J g - [0.04 + 0.029.} 5'. 4,4 — £9,03a=—-‘—> . E _ ‘1. \,\2_ wk \5l r gm: §-¥(bl)’é%i( 6) Is Eric’s new portfolio over- or under-priced? Explain why this is n_o_t surprising, (4 p15) 5. . : {EL 0 E}, 3 AR - :24 E32“ + oafi EBB" EVan ffi'Q'lZX?) " .1 :2 43.01 " + i. YS:D& - 4.93 — 0,45 + 0.3 a :: [43,051 ‘1 «X: 43.05 — [3 + 4.998 *(451 3)] oar. 43533"- E New] o(= 0.93% O. s on dag] 010' O _ ...
View Full Document

This note was uploaded on 02/29/2012 for the course FINA 6275 taught by Professor Gerganajostova during the Spring '12 term at GWU.

Page1 / 7

DOC - I L QUESTION] (22 points) fl ’3 tie/V Cg ’ :...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online