MKT_ret is the equity return of the market; traesuryret is the return of long-term treasury bonds; rf is the riskfree rate.
year
MKT_ret treasuryret
rf
Mean-2*SD Mean+2*SD MKT-E3
1927 0.3340023
0.089449 0.0313408 -0.3010484 0.52891409
1928 0.3907055
0.000
Markovs Trilemma
1.1)
The weights change because since the correlation between GE and GM is higher it means that as
the expected return of one increases the other one increases by (0.8) compared to 0.26. This rate
being higher, we would prefer to diversif
Solutions to Homework 6
3. Calculate the fair forward price on a non-dividend paying stock whose current price is $50,
assuming 5% interest rate and one year to maturity. How can you make an arbitrage profit (i.e., 0
net investment and positive, risk-free
CHAPTER 1: THE INVESTMENT ENVIRONMENT
PROBLEM SETS
1.
Ultimately, it is true that real assets determine the material well being of an
economy. Nevertheless, individuals can benefit when financial engineering creates
new products that allow them to manage
BUFN740 HW1
Ruixiang Huang
CH1.4: If there were no markets in which one could trade financial assets, firms
would not be able to issue stocks, which means it would be hard for firms to raise
their capital. This would lead to an increase in the cost of cap
Ruixiang Huang
BUFN640-DC51
HW#3
Chapter 9
1.
Beta=(18%-6%)/(14%-6%)=1.5
2. P=$50
E(rp)=14% rf=6%
E(rm)-rf=8.5%
Correlation doubles and all other remains the same, which means covariance also
doubles. And beta doubles.
New beta=[(14%-6%)/8.5%]*2=1.8824
Ne
1.a.
Alpha
Beta
Lo 10
Dec 5
Hi 10
-0.2249185 0.1336517 0.4855599
1.1026006 0.8917857 0.9388424
2.a.
Alpha
Beta
Low
5
High
-1.0457229 -0.1195914
0.52858
1.3329735 0.8827176 1.1974884
Alpha increases from portfolio Lo10 to Hi10, while beta remains around
1.
Ruixiang Huang
BUFN740
HW4
CH11
7. a. Returns are not properly adjusted for risk. This may because that CAPM does
not consider all variables and risks. If two firms have the same expected earnings, the
riskier one may have a lower price and lower P/E rati
n
1. Given n possibilities of outcome, the expected rate of return is
E ( r ) r p j rj
j 1
n
2. The variance is Var (r ) r2 E (r E (r )2 p j (rj r )2
j 1
3. Covariance:
Cov(r1 , r2 ) 12 E r1 E (r1 ) r2 E (r2 ) p j r1 j r1 r2 j r2
n
j 1
4. Correlation: 12