FIN 357 Business Finance

Homework 3

Due Mon, August 1, 2011 by the beginning of the class

This assignment is to be completed individually .You may use calculators or Excel to make your life

easier; however, what you hand in must make it clear that you understand how to complete the problem.

In other words, show your work, not just an answer.

Chapter 12

Questions and Problems: 1, 7

Chapter 13

Questions and Problems: 10,12,17,24

Chapter 12

1. Calculating returns) Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40

per share during the year, and had an ending share price of $102. Compute the percentage total return.

7. Calculating returns and variability) Using the following returns, calculate the arithmetic average

returns, the variances, and the standard deviations for X and Y. (Note that these numbers are from a

historical data)

Y ea r

1

2

3

4

5

R e t u r ns

X

8%

21

17

-16

9

Y

16%

38

14

-21

26

Chapter 13.

10. Returns and Standard Deviations) Consider the following information:

S t a t e of E co n o m y

Boom

Good

Poor

Bust

P r ob a b i l i t y

.15

.45

.35

.05

S t oc k A

.30

.12

.01

-.06

R a t e of r e t u r n

S t oc k B

.45

.10

-.15

-.30

S t oc k C

.33

.15

-.05

-.09

a. Your portfolio is invested 30 percent each in A and C, and 40 percent in B. What is the expected

return of the portfolio?

b. What is the variance of this portfolio? The standard deviation?

12. Calculating Portfolio Betas) You own a portfolio equally invested in a risk-free asset and two

stocks. If one of the stocks has a beta of 1.38 and the total portfolio is equally as risky as the market,

what must the beta be for the other stock in your portfolio?

17. Using CAPM) A stock has a beta of 1.35 and an expected return of 16 percent. A risk-free asset

currently earns 4.8 percent.

a. What is the expected return on a portfolio that is equally invested in the two assets?

b. If a portfolio of the two assets has a beta of .95, what are the portfolio weights?

c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta?

d. If a portfolio of the two assets has a beta of 2.70, what are the portfolio weights? How do you

interpret the weights for the two assets in this case? Explain.

24. Analyzing a Portfolio) You want to create a portfolio equally as risky as the market and you have

$1,000,000 to invest. Given this information, fill in the rest of the following table.

A ss e t

Stock A

Stock B

Stock C

Risk-free asset

I n v est m e n t

$210,000

$320,000

?

?

B et a

.85

1.20

1.35

?