Use Google Finance to look at stock prices, look for GOOG(Google), follow the link for
historical prices. Look at weekly returns from Aug 26, 2008 to Aug 25, 2009, and then
click on Download to spreadsheet. Use the Close values to calculate
A firm that first insists that it invests a specific percentage of its portfolio in bonds, stock,
and in treasury bills, rather than first trying to identify specific good stocks or bonds, is
most likely practicing what type of portfolio con
Suggested Answers for Problem Set 3
1. See ECON 171 2016 PS3 Q1.xlxs.
(a) The average and standard deviation of S&P500 returns is 0.00923 and 0.04421, respectively. See cells B555 and B556.
(b) The a
Some More Practice Problems
First some useful formulae:
(1 + r)t
E[rc ] = rf + y (E[rp ] rf )
c = yp
1. Present value: The 10-year interest rate is 2%. A
Portfolio Selection: 1 risk free and 2 risky assets
A Portfolio of Two Stocks
Portfolio Opportunity Set
Add a Risk Free Asset to get CAL
Optimal Complete Portfolio
Portfolio of MSFT and XOM
Inputs (from last class):
XOM = 16.3%, MS = 32%
A Practice Problem
Consider a world with two periods, 0 and 1. In period 1, there are two possible states, s: blue
and red. In period 0 we observe two assets, A and B.
Asset A pays $120 in the blue
Problem Set 3
Due in class, Tuesday, September 20, 2016
1. Download monthly returns for the S&P 500 index data from CRSP (value weighted, including dividends). Also download the 30-day Tbill monthly
Risk Preferences and Capital Allocation
1. Attitudes Towards Risk
2. the Mean-Variance Criterion
3. Capital Allocation and Portfolio Choice
Remember from our discussion of risk and return: assets with a
higher risk tend to have a higher
The Capital Allocation Line (CAL)
Two Risky Assets
What portfolio should an investor invest in?
This question has two parts:
1. What risk return combinations are available?
2. What pr
Problem Set 2
Due in class, not electronically, Tuesday, September 13, 2016
1. Present value, future value
(a) Currently, the interest rate in the market (LIBOR) is 0.8%. You decide to take 50,000
Suggested Answers for Problem Set 2
1. Present value, future value
(a) The question asks for the future value of $50,000 in 1 year:
Future value (Compounding): P (t) = P (0) (1 + r)t
P (1) = $50, 000
Suggested Answers for Problem Set 1
1. Suppose housing prices across the world double.
(a) No. The increase in price did not add to the productive capacity of the economy.
(b) Yes, the value of the e
1. Consider that 2 investment funds exist. ABC Fund(invested in 50% normal stock
and 50% risky bonds) and 123 Fund(invested in 25% High risk stock and 75%
Assume you have the following historical data of annual returns:
1. Using the single factor model for firm with a Beta of 1 and when the standard
deviation of the market is .275.
A. What can we say about the standard deviation of this firms stock?
The firm will have a standard deviation of .275 or greater, a
1. Write out the CAPM Model and explain each part.
E(ri) = rf + i [E(rM) - rf]
E(ri) =expected return of the security i
E(rM)= the expected return on the market
Rf= the risk free rate
i= the beta or a measurement of the extent that security is
1. Abnormal returns, if a stock has a=.004, b=1.2,
A. Using the market model (eq. 11.1), find the expected percent return if the
market increases by 2%.
E(r )= .004+ 1.2*(.02)=.028
B. If the actual return is 2%, 3%, or 4%, calculate the abnorma
A. Calculate the value of a 3 year 8% coupon bond with semiannual payments,
1000 par. Expected return is the risk free rate of 3%.
B. If in 50 days the next coupon will be paid, what is
1. Draw the following:
A. The gross payoffs(do not factor in the cost of the options) of buying 2 calls
and one put, graph this over stock price(x) and payoff(y) space. Assume they
have the same strike.
The right hand side
1. Using a two year semiannual 8% coupon bond, 1000 par, with a 5% YTM. For
this question find all answers to at least the 6th decimal place.
A. Calculate the price of this bond
1. Find the value of a stock using the constant growth DDM, if the last dividend paid
is $3 and the beta=.85, market risk premium is 5%, risk free rate is 3% and the
dividend growth rate is 0, 3 or 5%?
K= .85(.05)+.03= .0725
0: (3*(1+.0)/( .07
1. Welma wants to buy an elephant but she does not currently have the 14,000
required to buy the type of elephant she wants.
A. If she hopes to buy the elephant at this same price in three years, how much
does she need to invest in 5% annually