8.You inherit $20,000 and decide to invest in a mutual fund. The front-end load is 5% and the annual management fees, which are paid at the end of each year, are .8%. The fund has gross returns of 9% in the first year and 12% in the second year. After two years, your effective annualized holding period return is closest to: A.6.62% B.6.83% C.7.69% D.9.61% Answer: Solution: After the front end load, you have (1 - .05) = .95 (95%) of your original investment. This .95 is worth (1 + .09) x (1 - .008) = 1.02722 (102.722%) of your original investment after the first year and 1.02722 x (1 + .12) x (1 - .008) = 1.14128 after the second year. The effective annualized return is (1.14128) ^ (1/2) - 1 = .06831 (6.83 rounded).

B

4

Section 2: Brief Essays (76 points total) A.You are managing $2,000,000 in a well-diversified portfolio of large capitalization stocks. You expect your portfolio to return 12% over the coming year. If you assume the annualized volatility of your portfolio is 18%, what is the value at risk of your portfolio in six months’ time to a 5% confidence interval using a single-tailed test (i.e., only considering the downside)? (10 points)

B.Assume Starbucks’ stock has an expected annual return of 14% and an annual volatility of 40%, while Boeing’s stock has an expected annual return of 10% and an annual volatility of 30%. (i) Calculate the expected return and volatility (i.e., standard deviation) of a portfolio consisting of 50% of Starbucks’ stock and 50% of Boeing’s stock if the correlation between the two securities is 40%. (9 points)

5