Test 1 Investment Portfolio

.........................................................................................................................................
Usos: XXXX Name&Surname Student ID XXX 5.05.2022

1. Calculate the maximum expected rate of return (Rp) on the annual two-component
investment portfolio RUN and determine the optimal structure of this portfolio,
consisting of: 1)stocks, and 2)Treasury bills. These assets yield, respectively, the expected
rates of return 15% and 6%. An investor maximizing the rate of return intends to use only
own capital and build the portfolio with the expected risk smaller or equal to 8%
(measured by standard deviation of returns). The expected standard deviation of the
returns on stocks is 12% per annum, and investments in Treasury bills are risk-free.
Compute the Coefficient of Variation (CVP) for the optimal portfolio.
Variance of the portfolio composed of two assets: Vp = w12σ12 + w22σ22 + 2w1w2σ1σ2ρ12
Rp (%) = a) 6,5 b) 9,8 c) 12,0 d) 13,5
Expected rate Expected Standard Shares of assets in
Assets of return Deviation the RUN Portfolio
(i) ri σi wi
1. Stocks 15% 12% w1 = ?
2. T. Bills 6% 0% w2 =1- w1
RUN Portfolio rp= max ! σp ≤ 8% 1

Solution:
c) 12%

W₁ = σp /σ1= 8%/12 % =0,67=67% (share od stocks)

w₂=1 - w₁= 1-0,67 = 0,33=33% (share of Treasury Bills)

R=1₂"w₁+1₂" (1-w₁) = max

Rp = 15%*0,67+ 6% *0,33 =12%

2. Calculate the shares of both assets in the RUN Portfolio (Rp) if the investor decided to
increase the acceptable risk of the portfolio to 10% (measured by the standard deviation)
What would then be the expected rate of return on the portfolio and the Coefficient of
Variation?
Rp (%) = a) 6,5 b) 9,8 c) 12,0 d) 13,5

Solution
d) 13,5%

W₁= σp /σ1 = 10%/12% = 0,83 = 83%

W₂ = 1-W₁ =1-0,83 = 0,17 = 17%
Rp= r₁ * W₁+r₂*(1-w₁) = max
Rp = 15%*0,83+ 6% *0,17=13.5%

1
3. The two-year structured product offered by the bank, with a guarantee of full capital
protection, includes a zero-coupon Treasury Bond with a redemption value of F = PLN
1500 and a maturity at n = 2 years. The purchase price of this bond at the time of
issue (Present Value) is P = PLN 12000. Calculate the average annual geometric rate
of return (i) of this bond for the bank.
i (%) = a) 1,18 b) 2,70 c) 3,26 d) 11,80

Solution
d): 11,80%

i = √ (15000/12000) -1= √1.25 -1 = 1,11-1 = 0.1180%

4. 1. Estimate by use of the Gordon method the value of a stock of company X, which
has a constant dividend growth rate (g). The last annual dividend paid was D 0= PLN 8
per stock, the rate of return on equity ROE = 10%, and the retention ratio f = 20%.
The rate of return of stocks required by the investor i=8%.

Solution: 136

P= D1/(r-g)

g=10 %*20% =2%

P= (8+8*2%)/ (8% -2%) = 136

2.What would be the valuation of the company's stocks for the same investor if the
annual dividend was fixed at D = PLN 8 per stock, and g=0?

Solution: 100

P-D1/(r-g)

g=0%

P=8/8% =100