1.(Portfolio
expected rate of return) Jim inherited $100,000 portfolio of investments. The
portfolio is comprised of the following 3 investments.
Expected Rate of
Return $Value
T-Bills 2.9%
$50,000
GMC 6.5%
$31,000
Harley
Davidson 13.4% $
19,000
a.)Based on
the current portfolio composition and the expected rates of return, what is the
expected rate of return on Jim’s portfolio.
b.)If Jim
wants to increase his expected portfolio rate of return, he could increase the
allocated weight of the portfolio he has invested in stock (GMC and Harley
Davidson) and decrease his holdings of T-Bills. If Jim moves all his money out
of T-Bills and splits it evenly between the two stocks, what will be his
expected rate of return?
2.(CAPM and
expected returns)Given the following holding period returns.
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Month INT Corp Market
1 2.4% 1.8%
2 -1.0% 3.0%
3 1.0% 2.0%
4 -1.0% -1.0%
5 6.0% 7.0%
6 6.0% 1.0%
a.)Compute
the average returns and the standard deviation for INT Corp and the Market.
These are
the equations used in practice questions to solve a.)
Average Rate or return= Rate of Return 1+ Rate of Return 2+
Rate of Return 3 + ………+ Rate of Return (n) - ----------------------------------------------------------------------------------------------------------
n
Variance in Rates of Return={Rate of Return 1-Average Rate
of Return}^2 +{Rate of Return 2-Average Rate of Return}^2 +…………….+ {Rate of
Return(n)-Average Rate of Return}^2
-
------------------------------------------------------------------------------------------------------------------------------ .
n-1
Standard Deviation= Square
root of variance (Övariance)
b.) If INT
Corp beta is 1.82 and the risk free rate is 6%, what would be an expected
return for an investor owning INT Corp?(Note: because the preceding returns are
based on monthly data, you will need to annualize the returns to make them
comparable with the risk free rate, you can convert from monthly to yearly
returns by multiplying the average monthly returns by 12)
Security
line equation, which is often referred to as CAPM Pricing Model
Equation
used in practice questions to solve b.)
Expected Return on Risky Asset=Risk Free Rate of Return
+beta for Asset x{Expected Return on Market Portfolio–Risk Free Rate of Return}
b. part 2=
historical annual return for INT Corp is = to the average monthly return
multiplied by 12.
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