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# Practice Problems for Midterm Use the following information for problems 1-3.

You have been asked to create a small index of North Carolina Stocks using Cree Research (CREE), Duke Energy (DUK), Bank of America (BAC ), and Goodrich (GR). Your manager asks you to prepare a priceweighted and a market-weighted index for comparison purposes.
Stock CREE DUK BAC GR Price, t=0 \$30.73 \$14.10 \$11.41 \$52.18 Price, t=1 \$30.21 \$14.08 \$13.25 \$48.25 Shares (million) 89 1287 8357 124

8. Consider the data below from the December 2005 balance sheet of the Doc Russell Growth Fund (all values are in millions). What was the net asset value of the portfolio? Assets: Liabilities: Shares: 6,425.8 108.5 894.3

9. An investors portfolio currently is worth \$10 million. During the year, the investor sells 12,000 shares of Microsoft at a price of \$25 per share and 40,000 shares of Ford at a price of \$6 per share. The proceeds are used to buy 8,000 shares of IBM at \$70 per share. What was the portfolio turnover rate? 10. A fund begins with \$4 billion and reports the following five-month results (with negative figures in parentheses): Month 3 (95) (15)

Net inflows (end of month, \$million) HPR (%) A. B. Calculate the arithmetic return Calculate the geometric return

1 18 2

2 21 12

4 15 21

5 45 15

11. Suppose the rate of return of a risk-free asset is 5%, the expected return on a portfolio of risky assets is 12%, and the standard deviation of the risky portfolio is 18%. What are the expected return, risk premium, standard deviation, and ratio of risk premium to standard deviation for a complete portfolio with y = .60? 12. Suppose the risk premium on the market portfolio is estimated at 7.1% with a standard deviation of 28%. What is the risk premium on a portfolio invested in 40% Google with a beta of 1.8 and 60% in Duke with a beta of 0.9? 13. ABC is expected to return 18% with a beta of 1.6. The markets expected return is 12% and rf = 3%. = E(r) - {rf + [E(rm) rf]} a. According to the CAPM, which stock is a better buy? b. What is the alpha for each stock? c. Plot the SML and the two stocks and show the alphas of each on the graph.

14. Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 22%. The current T-bill rate is 5%. Your client chooses to invest 62% of a portfolio in your fund and the remaining 38% in a Tbill money market fund. Suppose your risky portfolio includes the following investments in the given proportions:

## 30% 32% 38%

What is the reward-to-variability ratio (S) of your risky portfolio and your clients overall portfolio? 15. You open a brokerage account and purchase 500 shares of IBM at \$77.62 by borrowing half of the required funds (you pay for 250 shares and borrow enough to buy another 250 shares). You pay 7% annual interest on the borrowed money. At the end of one year, what price would trigger a margin call if the maintenance margin were set at 30% by the brokerage firm? Use the following information for problems 16-19:

Time 1 2 3 4 5

A (%) 12 4 -10 8 12

B (%) 7 3 4 12 5

C (%) 22 -13 4 22 0

D% 3 6 -12 34 9

Market (%) 8 21 11 -2 12

16. Calculate the geometric return for security B. 17. Calculate the covariance of securities A and C. 18. Calculate the beta of security D with the market. 19. Calculate the portfolio variance if you put of your money in B and the other in the market.