quiz4_w07e_ans

# quiz4_w07e_ans - (1/3.12.03.15)=.08 b What is the standard...

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Note: In responding to "WHY/Explain" you should N AME ________________________________ give a meaningful explanation that would convince a skeptic. S CHOOL   OF  B USINESS  A DMINISTRATION F INANCE  350 Q UIZ  #4 P ROF . J ARRAD  H ARFORD For this quiz, assume the following: The risk-free rate is 5% and the expected return on the market is 11%. Boeing has a beta of 1.1 and a standard deviation of 30%. Safeco Insurance has an average return of 9%, a beta of 0.67 and a standard deviation of 20%. Boeing and Safeco have a correlation coefficient of 0.22. 1. What is the expected return and standard deviation of a portfolio that is 45% Boeing and 55% Safeco? [3] E[R B ] = .05+1.1(.11-.05)=.116 E[R P ] = (.45)(.116)+(.55)(.09) = .1017 σ 2 = (.45) 2 (.3) 2 + (.55) 2 (.2) 2 + 2(.45)(.55)(.3)(.2)(.22)=.036859 σ = .192 2. The last 3 months of returns for stock C are the following: a. What is the expected return for next month? [1]
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Unformatted text preview: (1/3)(.12-.03+.15)=.08 b. What is the standard deviation of the stock’s returns? [1] ( 29 ( 29 ( 29 2 2 2 2 .12 .08 .03 .08 .15 .08 .0093 3 1 .0964 σ-+ --+-= =-= 3. If Boeing is thinking about selling insurance, what discount rate should it use in its NPV? [1] Boeing should use a discount rate appropriate to selling insurance, such as Safeco’s expected return, which is 9%, given above (you can also calculate it from the CAPM: .05+.67(.11-.05)=.09). 1 2 3 12%-3% 15% Also write your name on the back. 1 ) ( ... ) ( ) ( 2 2 ) ] [ ( ] [ ] [ ] [ ] [ ... ] [ 2 2 2 2 1 2 2 2 2 2 2 2 1--+ +-+-= ± + + =-+ = + = + + = T R R R R R R R w w w w r R E r R E R E w R E w R E T R R R R E T AB B A B A B B A A p f m i f i B B A A p T ρ β...
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