14)

Kimmy has invested 20% of her funds in Treasury bills and 80% in an "index fund"

that represents all U.S. common stocks. The rate of return of an investment over a time period is

the percent change in the price during the time period, plus any income received. If X is the

annual return on T-bills and Y is the annual return on stocks, the portfolio rate of return is

R = 0.2X + 0.8Y

The returns X and Y are random variables because they vary from year to year: Based on annual

returns between 1950 and 2018, we have

X = annual return on T-bills

X = 5.0% X = 2.9%

Y = annual return on stocks

Y =13.2% Y =17.6%

Correlation between X and Y

= 0.11

Stocks had higher returns than T-bills on the average, but the standard deviations show that

returns on stocks varied much more from year to year: That is, the risk of investing in stocks is

greater than the risk for T-bills because their returns are less predictable.

a) Compute the expected return R on kimmy's portfolio of 20% T-bills and 80% stocks.

b) The portfolio has a smaller mean return than an all-stock portfolio, but it is also less risky.

Find the variance of the portfolio returns.

(show all work and steps)

9)

A firm has an annual dividend yield of 7.5% and a constant dividend growth rate

of 3% per year. It also has five year bonds outstanding that have an annual coupon rate of 8%

and are selling at par. The firm has a 40% tax rate and a debt-to-assets ratio of 0.3. The firm's

after-tax weighted average cost of capital is:

(show all work and steps)