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FI515Week4 - DeVry FI515 200709 Week Four Chapter 7...

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DeVry FI515 200709 Week Four Chapter 7: Problems 7-4 and 7-7 Chapter 8: Problems 8-2, 8-5 and 8-7 Problem: Answer: Expected return of a portfolio = W A r A = (1-W A )r B =(.3)(.2) + (1-.3)(.18) =.036 + .126 = 0.162 or 16.2% Standard Deviation of a portfolio equation from pg 243. =Square root of (.3) 2 (.4) 2 +(1-.3) 2 (.6) 2 + 2(.3)(1-.3)).2)(.4)(.6) =.144+.1764+.02016 =.021096 or 21.1% Problem:
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Answer: 7-7 a. Beta Coefficient = 0.028 b. Average rate of return for x = Sum of Year 1 – 7 = 74.2 Average = 10% Standard Deviation = 13% Average for NYSE = 84.2/7 = 12% Standard Deviation = 16.5%
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Year NYSE Stock X 1 -26.50% -14.00% 2 37.2 23.00% 3 23.8 17.50% 4 -7.2 2.00% 5 6.6 8.10% 6 20.5 19.40% 7 30.6 18.20% 16.5063 5 0.13050 8 Standard Deviation c. rx = Rrf + (r – Rrf)Bx This equation can be solved for the risk-free rate, rRF, which is the only unknown: 10.6 = Rrf +(12.1 – Rrf)0.56 .44Rrf = 10.6 – 6.8 Rfr =3.8/.44 = 8.6% d. SML Equation: Required Return on Stock = risk free rate + market risk premium (beta) r i = 8.6+MRP(.56) The SML is plotted below. Data on the risk-free security (bRF = 0, rRF = 8.6%) and Security X (bX = 0.56, Xr = 10.6%) provide the two points through
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