Lê Thủy Tiên

1632300120
BUS 328
HW_W4

Please submit the answers for questions 1,2,7,13 (page 407, 408 and 409)
and 1,2,5,7,10,11,13,16,25 (page 443 to 447)

1. Calculating Returns Suppose a stock had an initial price of $72 per share,
paid a dividend of $1.20 per share during the year and had an ending share price
of $79. Compute the percentage total return.

Dividend yield = = = 0.017

Capital gains yield =

Total percentage return = dividend yield + capital gains yield

= 0.017 + 0.097 = 0.114 = 11.4%
2. Calculating Yields in Problem 1, what was the dividend yield? The capital
gains yield?
The dividend yield = 0.017 = 1.7%
The capital gains yield = 0.097 = 9.7%
7. Calculating Returns and Variability Using the following returns, calculate the
arithmetic average returns, the variances, and the standard deviations for X and Y
Arithmetic X = = 0.084 = 8.4%

Arithmetic Y = = 0.114 = 11.4%

The variance of X =
= 0.02 = 2%

The variance of Y =

= 0.065 = 6.5%
The standard deviations of X = = 0.14

The standard deviations of Y = = 0.25

13. Calculating Investment Returns You bought one of Great White Shark
Repellant Co.’s 8 percent coupon bonds one year ago for $1,030. These bonds make
annual payments and mature 14 years from now. Suppose you decide to sell your
bonds today, when the required return on the bonds is 7 percent. If the inflation
rate was 4.2 percent over the past year, what was your total real return on
investment?
Coupon = 8%
r = 7% = 0.07
n = 14
inflation rate = 4.2%
bond price = $1,030
New Bond Price =

= = $1087.45

Nominal rate = = 0.136 = 13.6%

Total real return =

1. Determining Portfolio Weights [LO1] What are the portfolio weights for a portfolio
that has 145 shares of Stock A that sell for $45 per share and 110 shares of Stock B
that sell for $27 per share?
Total value = 145 x ($45) + 110 x ($27) = $9,495

The portfolio weights for asset =

The portfolio weights for Stock A = = 0.69

The portfolio weights for Stock B = = 0.31

2. Portfolio Expected Return You own a portfolio that has $2,950 invested in Stock
A and $3,700 invested in Stock B. If the expected returns on these stocks are 8
percent and 11 percent, respectively, what is the expected return on the portfolio?
Total value = Invested in Stock A + Invested in Stock B = $2,950 + $3,700 = $6,650
The expected return on the portfolio = The weight of each asset times + The expected
return of each asset

= = 0.096 = 9.6%

5. Calculating Expected Return Based on the following information,

calculate the expected return:
The expected return = respective return x respective probability
= (0.30 x (-0.14)) + (0.70 x 0.22) = 0.112 = 11.2%
7. Calculating Returns and Standard Deviations Based on the following
information, calculate the expected return and standard deviation for the two
stocks:

E (RA) = 0.20 x (0.05) + 0.55 x (0.08) + 0.25 x (0.13) = 0.0865 = 8.65%

E (RB) = 0.20 x (-0.17) + 0.55 x (0.12) + 0.25 x (0.29) = 0.1045 = 10.45%

Standard Deviation of Stock A = 0.20 x (0.05 – 0.0865)2 + 0.55 x (0.08 – 0.0865)2 + 0.25

x (0.13 – 0.0865)2 = 0.00076 = = 0.0276 = 2.76%

Standard Deviation of Stock B = 0.20 x (-0.17 – 0.1045)2 + 0.55 x (0.12 – 0.1045)2 +

0.25 x (0.29 – 0.1045)2 = 0.0238 = = 0.154 = 15.4%

10. Returns and Standard Deviations Consider the following information:

 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?
The expected return of Boom = (0.35 x 30%) + (0.45 x 40%) + (0.27 x 30%) = 0.366 = 36.6%
The expected return of Good = (0.16 x 30%) + (0.10 x 40%) + (0.08 x 30%) = 0.112 = 11.2%
The expected return of Poor = (-0.01 x 30%) + (-0.06 x 40%) + (-0.04 x 30%) = -0.039 = -3.9%
The expected return of Bust = (-0.12 x 30%) + (-0.20 x 40%) + (-0.09 x 30%) = -0.143 = -14.3%
 The expected return of the portfolio = (0.15 x 36.6%) + (0.55 x 11.2%) + (0.25 x
(-3.9%)) + (0.05 x (-14.3%)) = 0.0996 = 9.96%
b. What is the variance of this portfolio? The standard deviation?
The variance of portfolio = 0.15 x (36.6% - 9.96%)2 + 0.55 x (11.2% - 9.96%)2 + 0.25 x
(-3.9% - 9.96%)2 + 0.05 x (-14.3% - 9.96%)2 = 0.018
The standard deviation = = 0.134 = 13.4%
11. Calculating Portfolio Betas You own a stock portfolio invested 35 percent
in Stock Q, 25 percent in Stock R, 30 percent in Stock S, and 10 percent in Stock
T. The betas for these four stocks are .84, 1.17, 1.11, and 1.36, respectively. What is
the portfolio beta?
The portfolio beta = respective beta x respective weight
= (0.35 x 0.84) + (0.25 x 1.17) + (0.30 x 1.11) + (0.10 x 1.36)
= 1.0555

13. Using CAPM A stock has a beta of 1.05, the expected return on the market
is 10 percent, and the risk-free rate is 3.8 percent. What must the expected return on
this stock be?
E (Ri) = 0.038 + (0.10 – 0.038) x (1.05) = 0.1031 = 10.31%
16. Using CAPM A stock has an expected return of 13.3 percent, its beta
is 1.45, and the expected return on the market is 10.5 percent. What must the
risk-free rate be?
Return on Stock = risk-free rate + [beta x (market return – risk-free rate)]
→ 0.133 = risk-free rate + [1.45 x (0.105 – risk-free rate)]
→ 0.133 = risk-free rate + (0.15 – 1.45 risk-free rate)
→ 0.133 – 0.15 = risk-free rate – 1.45 risk-free rate
→ -0.017 = -1.45 risk-free rate
→ Risk-free rate = 1.433%
25. Analyzing a Portfolio You have $100,000 to invest in a portfolio containing Stock
X and Stock Y. Your goal is to create a portfolio that has an expected
return of 17 percent. If Stock X has an expected return of 14.8 percent and a beta
of 1.35, and Stock Y has an expected return of 11.2 percent and a beta of .90, how
much money will you invest in Stock Y? How do you interpret your answer? What
is the beta of your portfolio?
E (Rp) = Wx x Rx + Wy x Ry
→ 0.17 = Wx x 0.148 + (1- Wx) x 0.112
→ 0.17 = 0.148Wx + 0.112 – 0.112Wx
→ 0.17 – 0.112 = 0.148Wx – 0.112Wx
→ 0.058 = 0.036Wx
→ Wx = 1.61
→ Wy = (1- Wx) = (1- 1.61) = -0.61
Money that I invest in Stock Y = -0.61 x $100,000 = -$61,000
The beta of portfolio = (1.61 x 1.35) + (-0.61 x 0.90) = 1.62