1. Current price of stock X and Y are $54 and $32 respectively.

A financial analyst of ABC

Security Company forecasts the price of stock X and Y after 1 year as following:
Economic conditions Probability Price of stock X Price of stock Y
Bad 0.2 42 27
OK 0.4 58 35
Good 0.4 65 40

a. What are expected return and standard deviation of the two stocks.
b. What are expected return and standard deviation of the risky portfolio P which invests 60% in
stock X and 40% in stock Y.
c. How much should investor invest in risky portfolio P in order to construct an optimized
complete portfolio, given risk-free rate is 6% and A = 3.
d. What are expected return and standard deviation of optimized complete portfolio?

2. An investor is considering adding a risk-free asset with a return of 3% into his risky portfolio.
The expected return and standard deviation of the risky portfolio is 7% and 15%. His risk
aversion value is 2
a) Calculate the optimal proportion invested in risk-free asset
b) Write an equation for the capital allocation line that will connect the risk-free asset to the
portfolio of risky assets
c) What is the standard deviation of the new portfolio that gives a 9% return and is on the
capital allocation line?

3. Price in 2013 of stock X and Y are $54 and $32 respectively. And the third is a T-bill that
yield a rate of 7%. A financial analyst of ABC Security Company forecasts the price of stock X
and Y after 1 year as following:
Period X Y

2014 52 30

2015 58 39

2016 55 32

2017 53 37

2018 64 39

a/ What are the investment proportion in the minimum-variance portfolio of the two risky assets,
and what is the expected return and standard deviation of the portfolio?

b/ What are the investment proportion of (S) and (B) in the optimal risky portfolio, and what is
the expected return and standard deviation of the portfolio?
 c/ What is the Sharpe ratio of the best feasible CAL?

d/ You require that your complete portfolio yield an expected return of 16%, and that it be
efficient, on the best feasible CAL. What is the standard deviation of your portfolio? What is the
proportion invested in the T-bill fund and risky portfolio?

4. Rf= 5%
Expected return Standard deviation
Optimal risky portfolio 11% 9%
Minimum-variance 9% 7%
portfolio
a/ If the investor chooses to invest 60% in the optimal risky portfolio and 40% in a T-bill
(Complete portfolio 1). Calculate the expected return and standard deviation of the complete
portfolio 1
b/ If the investor chooses to invest 70% in the minimum-variance portfolio and 30% in a T-
bill (Complete portfolio 2). Calculate the expected return and standard deviation of the complete
portfolio 2 (0.5 score)
c/ Which complete portfolio that investor should choose if his degree of risk aversion is 3.
5. Current price of stock X and Y are $54 and $32 respectively. A financial analyst of ABC
Security Company forecasts the price of stock X and Y after 1 year as following:

Economic conditions Probability Price of stock X Price of stock Y

Bad 0.2 42 27

OK 0.4 58 35

Good 0.4 65 40

a. What are expected return and standard deviation of the two stocks.

b. What are expected return and standard deviation of the risky portfolio P which invests 60% in
A stock and 40% in B stock.

c. How much should investor invest in risky portfolio P in order to construct an optimized
complete portfolio, given risk-free rate is 5% and A = 2.

d. What are expected return and standard deviation of optimized complete portfolio.

e. There is another alternative portfolio which has expected return 18% and standard deviation
22%. Which portfolio should the investor invest in?
6. Bond A has 5% coupon rate, maturity is 10 years, YTM=7%
a. Find HPR for a year investment period if YTM is 6% in the end of year.
b. If you sell bond after 1 year, tax on interest income is 40% and tax rate on capital gain is 30%.
The bond is subject to original issue discount tax treatment.
c. What is after tax holding period return on the bond?