Chapter 13

Problems 1-28

Input boxes in tan

Output boxes in yellow
Given data in blue
Calculations in red
Answers in green

NOTE: Some functions used in these spreadsheets may require that

the "Analysis ToolPak" or "Solver Add-In" be installed in Excel.
To install these, click on the Office button
then "Excel Options," "Add-Ins" and select
"Go." Check "Analyis ToolPak" and
"Solver Add-In," then click "OK."
equire that
Chapter 13
Question 1

Input area:

Shares of A 180
Share price of A $ 45.00
Shares of B 140
Share price of B $ 27.00

Output area:

Portfolio value $ 11,880

Weight of A 0.6818

Weight of B 0.3182
Chapter 13
Question 2

Input area:

Stock A value $ 2,950

Stock B value $ 3,700
Stock A E(R) 11.00%
Stock B E(R) 15.00%

Output area:

Portfolio value $ 6,650

Weight of A 0.4436

Weight of B 0.5564

Portfolio E(R) 13.23%

Chapter 13
Question 3

Input area:

Weight of X 60.00%
Weight of Y 25.00%
Weight of Z 15.00%
Stock X E(R) 9.00%
Stock Y E(R) 17.00%
Stock Z E(R) 13.00%

Output area:

Portfolio E(R) 11.60%

Chapter 13
Question 4

Input area:

Portfolio value $ 10,000

Stock X E(R) 14.00%
Stock Y E(R) 10.50%
Portfolio E(R) 12.40%

Output area:

Weight of Stock X 0.5429

Weight of Stock Y 0.4571

Dollar in Stock X $ 5,428.57

Dollars in Stock Y $ 4,571.43

Chapter 13
Question 5

Input area:

State Probability Return

Recession 0.25 -0.08
Boom 0.75 0.21

Output area:

State Probability Return Product

Recession 0.25 (0.08) (0.0200)
Boom 0.75 0.21 0.1575
Expected return 0.1375
Chapter 13
Question 6

Input area:

State Probability Return

Recession 0.20 (0.05)
Normal 0.50 0.12
Boom 0.30 0.25

Output area:

State Probability Return Product

Recession 0.20 (0.05) (0.0100)
Nprmal 0.50 0.12 0.0600
Boom 0.30 0.25 0.0750
Expected return 0.1250
Chapter 13
Question 7

Input area:

State Probability Stock A Stock B

Recession 0.15 0.05 (0.17)
Normal 0.65 0.08 0.12
Boom 0.20 0.13 0.29

Output area:

Stock A Probability Return Product

Recession 0.15 0.05 0.0075
Normal 0.65 0.08 0.0520
Boom 0.20 0.13 0.0260
E(R) = 8.55%

Standard Deviation = 2.46%

Stock B Probability Return Product

Recession 0.15 (0.17) (0.0255)
Normal 0.65 0.12 0.0780
Boom 0.20 0.29 0.0580
E(R) = 11.05%

Standard Deviation = 13.53%

 Return Squared
Deviation Deviation Product
(0.0355) 0.00126 0.000189038
(0.0055) 0.00003 1.96625E-05
0.0445 0.00198 0.00039605
Variance = 0.00060

Return Squared
Deviation Deviation Product
(0.2805) 0.07868 0.011802038
0.0095 0.00009 5.86625E-05
0.1795 0.03222 0.00644405
Variance = 0.01830
Chapter 13
Question 8

Input area:

Weight of G 25.00%
Weight of J 55.00%
Weight of K 20.00%
Stock G E(R) 8.00%
Stock J E(R) 15.00%
Stock K E(R) 24.00%

Output area:

Portfolio E(R) 15.05%

 Chapter 13
Question 9

Input area:

State Probability Stock A Stock B Stock C

Recession 0.35 0.07 0.15 0.33
Boom 0.65 0.13 0.03 (0.06)

a. weights 0.33 0.33 0.33

b. weights 0.20 0.20 0.60

Output area:

Portfolio
a. Stock A Probability Return Product
Recession 0.35 0.1833 0.0642
Boom 0.65 0.0333 0.0217
E(R) = 0.0858

Return Squared
b. Stock A Probability Return Product Deviation Deviation Product
Recession 0.35 0.2420 0.0847 0.1599 0.02557 0.008948804
Boom 0.65 (0.0040) (0.0026) (0.0861) 0.00741 0.004818587
E(R) = 0.0821 Variance = 0.013767
Chapter 13
Question 10

Input area:

State Probability Stock A Stock B Stock C

Boom 0.15 0.30 0.45 0.33
Good 0.45 0.12 0.10 0.15
Poor 0.35 0.01 (0.15) (0.05)
Bust 0.05 (0.06) (0.30) (0.09)

weights 0.30 0.40 0.30

Output area:

Portfolio Return Squared

Stock A Probability Return Product Deviation Deviation Product
Boom 0.15 0.3690 0.0554 0.2927 0.08564 0.012846603
Good 0.45 0.1210 0.0545 0.0447 0.00199 0.00089713
Poor 0.35 (0.0720) (0.0252) (0.1484) 0.02201 0.007702703
Bust 0.05 (0.1650) (0.0083) (0.2414) 0.05825 0.002912491
E(R) = 0.0764 Variance = 0.02436

Standard Deviation = 15.61%

Chapter 13
Question 11

Input area:

Weight of Q 25.00%
Weight of R 20.00%
Weight of S 15.00%
Weight of T 40.00%
Beta of Q 0.84
Beta of R 1.17
Beta of S 1.11
Beta of T 1.36

Output area:

Portfolio E(R) 1.15

Chapter 13
Question 12

Input area:

Weight of risk-free 33.33%

Weight of Stock A 33.33%
Weight of Stock B 33.33%
Beta of risk-free 0.00
Beta of Stock A 1.38
Beta of Portfolio 1.00

Output area:

Beta of Stock B 1.62

Chapter 13
Question 13

Input area:

Beta 1.05
Market E(R) 11.00%
Risk-free return 5.20%

Output area:

Stock E(R) 11.29%

Chapter 13
Question 14

Input area:

Stock E(R) 10.20%

Risk-free return 4.50%
Market risk premium 8.50%

Output area:

Stock beta 0.67

Chapter 13
Question 15

Input area:

Stock E(R) 13.50%

Stock beta 1.17
Risk-free return 5.50%

Output area:

Market E(R) 12.34%

Chapter 13
Question 16

Input area:

Stock E(R) 14.00%

Stock beta 1.45
Market E(R) 11.50%

Output area:

Risk-free 5.94%
 Chapter 13
Question 17

Input area:

Stock beta 1.35

Stock E(R) 16.00%
Risk-free return 4.80%

a. Weight of stock 50.00%

b. Portfolio beta 0.95
c. Portfolio E(R) 8.00%
d. Portfolio beta 2.70

Output area:

a. Portfolio E(R) 10.40%

b. Weight of stock 0.7037

Weight of risk-free 0.2963

c. Weight of stock 0.2857

Portfolio beta 0.386

b. Weight of stock 200.00%

Weight of risk-free -100.00%

The portfolio is invested 200.00%

in the stock and -100.00%
in the risk-free asset. This represents
borrowing at the risk-free rate to buy
more of the stock.
Chapter 13
Question 18

Input area:

Stock E(R) 15.20%

Stock beta 1.25
Risk-free return 5.30%

Output area:

Slope of SML = 0.0792

Weight of W Portfolio E(R) Portfolio beta

0.00% 5.30% 0.000
25.00% 7.78% 0.313
50.00% 10.25% 0.625
75.00% 12.73% 0.938
100.00% 15.20% 1.250
125.00% 17.68% 1.563
150.00% 20.15% 1.875
Chapter 13
Question 19

Input area:

Stock Y beta 1.30

Stock Y E(R) 18.50%
Stock Z beta 0.70
Stock Z E(R) 12.10%
Risk-free rate 8.00%
Market risk premium 7.50%

Output area:

SML reward-to-risk 0.0750

Reward-to-risk ratios

Stock Y 0.0808

Stock Z 0.0586

Return predicted by CAPM

Stock Y 17.75%

Stock Z 13.25%

Stock Y is undervalued
Stock Z is overvalued
Chapter 13
Question 20

Input area:

Stock Y beta 1.30

Stock Y E(R) 18.50%
Stock Z beta 0.70
Stock Z E(R) 12.10%
Market risk premium 7.50%

Output area:

Risk-free rate 4.63%

Chapter 13
Question 21

Input area:

Large-company stocks 12.30%

Long-term government bonds 5.80%
Small company stock 17.10%
Treasury bills 3.80%

Output area:

Large-company stocks and

long-term government bonds
portfolio 9.05%

Small company stocks and

Treasury bill portfolio 10.45%
Chapter 13
Question 22

Output area:

(E[RA] - RF)/A = (E[RB] - RF)/B

RPA/A = RPB/B
B/A = RPB/RPA
 Chapter 13
Question 23

Input area:

State Probability Stock A Stock B

Boom 0.35 0.24 0.36
Normal 0.50 0.17 0.13
Bust 0.15 0.00 (0.28)

weights 0.40 0.40

b. T-bill rate 3.80%

c. Inflation rate 3.50%

Output area:

Portfolio
State Probability Return Product
Boom 0.35 0.350 0.1225
Poor 0.50 0.138 0.0690
Bust 0.15 (0.202) (0.0303)
E(R) = 0.1612

Standard Deviation 18.04%

b. Expected risk premium 12.32%

c. Approximate expected real return 12.62%

Exact expected real return 12.19%
Approximate expected real risk premium 12.32%
Exact expected real risk premium 11.90%
Stock C
0.55
0.09
(0.45)

0.20

Return Squared
Deviation Deviation Product
0.1888 0.03565 0.012475904
(0.0232) 0.00054 0.00026912
(0.3632) 0.13191 0.019787136
Variance = 0.03253
Chapter 13
Question 24

Input area:

Portfolio beta 1.00

Total investment $ 1,000,000

Asset Investment Beta

Stock A $ 210,000 0.85
Stock B $ 320,000 1.20
Stock C 1.35
Risk-free asset

Output area:

Asset Investment Beta

Stock A $ 210,000.00 0.85
Stock B $ 320,000.00 1.20
Stock C $ 324,074.07 1.35
Risk-free asset $ 145,925.93 0.00
Chapter 11
Question 25

Input area:

Total investment $100,000

Portfolio E(R) 18.50%
Stock X E(R) 17.20%
Stock X beta 1.40
Stock Y E(R) 13.60%
Stock Y beta 0.95

Output area:

Weight of Stock X 1.36111

Weight of Stock Y -0.36111

Dollar amount in X $ 136,111.11

Dollar amount in Y $ (36,111.11)

Portfolio beta 1.56

This represents shorting Stock Y.

Chapter 11
Question 26

Input area:

State Probability Stock I Stock II

Recession 0.25 0.11 (0.40)
Normal 0.50 0.29 0.10
Boom 0.25 0.13 0.56

Market risk premium 8.00%

Risk-free rate 4.00%

Output area:

Stock I Probability Return Product

Recession 0.25 0.11 0.0275
Normal 0.50 0.29 0.1450
Boom 0.25 0.13 0.0325
E(R) = 0.2050

Standard Deviation = 8.53%

Stock I beta = 2.06

Stock II Probability Return Product

Recession 0.25 (0.40) (0.1000)
Normal 0.50 0.10 0.0500
Boom 0.25 0.56 0.1400
E(R) = 0.0900

Standard Deviation = 33.96%

Stock II beta = 0.63

Although Stock II has more total risk than Stock I, it has much less systematic risk, since its b
Thus I has more systematic risk, and II has more unsystematic and total risk. Since unsystem
diversified away, I is actually the "riskier" stock despite the lack of volatility in its returns. Stock
risk premium and a greater expected return.
 Return Squared
Deviation Deviation Product
(0.0950) 0.00903 0.00225625
0.0850 0.00723 0.0036125
(0.0750) 0.00563 0.00140625
Variance = 0.00728

Return Squared
Deviation Deviation Product
(0.4900) 0.24010 0.060025
0.0100 0.00010 0.00005
0.4700 0.22090 0.055225
Variance = 0.11530

uch less systematic risk, since its beta is smaller than I's.
 atic and total risk. Since unsystematic risk can be
lack of volatility in its returns. Stock I will have a higher
Chapter 13
Question 27

Input area:

Beta Expected return

Pete beta 1.35 13.20%
Repete beta 0.80 10.10%

Output area:

Risk-free rate 5.59%

Market return
With Pete 11.23%
With Repete 11.23%
 Chapter 13
Question 28

Input area:

State Probability Stock A Stock B

Bust 0.15 (0.08) (0.05)
Normal 0.70 0.13 0.14
Boom 0.15 0.48 0.29

Amount Stock A's beta exceeds Stock B's beta 0.25

Output area:

a. Stock A Probability Return Product

Recession 0.15 (0.08) (0.0120)
Normal 0.70 0.13 0.0910
Boom 0.15 0.48 0.0720
E(R) = 15.10%

Stock B Probability Return Product

Recession 0.15 (0.05) (0.0075)
Normal 0.70 0.14 0.0980
Boom 0.15 0.29 0.0435
E(R) = 13.40%

b. Slope of SML 6.80% equals the market risk premium.