All questions to be solved on excel 1 (33 25 points) Assume that investors can choose between a riskless asset that pays 1 and four risky assets whose return and variance covariance matrix are as follows Risky Asset Expected Return Variance Covariance 1 7 10 3 6742 1 4142 3 1620 2 9 3 6742 15 6 9282 1 9360 3 12 1 4142 6 9282 20 6 7082 4 16 3 1623 1 9365 6 7082 25 a Determine the market portfolio and the market price of risk b Determine the Sharpe ratio for each risky asset c Determine the CAPM asset beta for each risky asset 2 (33 25 points) Alocac Co , is a consumer products firm whose stock exhibits the following sensitivities Response to Market Risk (Beta) 0 75 Response to Small minus Big Return (SMB) 0 7 Response to (High Value minus Low Value Return (HMB) 0 334 Use the data (last 3 months values) from the Fama French data library (http mba tuck dartmouth edu pages faculty ken french data library html) to derive an estimate of the required return on Alocac shares assuming a risk free rate of 2 percent Alocac regularly pays out 80 percent of its earnings as dividends This immediate year, it earned $3 per share It expects to earn $3 06 per share next year as this would reflect its typical earnings growth Does Alocac have valuable growth opportunities The current price of the Alocac is $20 per share What price would you predict for it next year 3 (33 25 points) Consider the following data for four firms F1 through F4 F1 F2 F3 F4 Market Bundle Sensitivity to Market Premium 1 200 1 600 0 600 0 587 1 000 Sensitivity to SMB 0 137 0 155 0 265 0 145 0 000 Sensitivity to HML 0 000 2 113 0 375 0 211 0 000 Create a bundle of the four risky assets worth exactly 100 of your wealth with zero systematic risk from each of the three risk factors Create a bundle of the four risky assets worth exactly 100 of your wealth that duplicates the systematic risk of the Market Bundle Assume that the Market Risk Premium is 7 and that the risk free rate is 3 What is the expected return on a portfolio comprised of 50 the bundle in 3A and 50 the bundle in 3b

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All questions to be solved on excel 1. (33/25 points) Assume that investors can choose between a riskless asset that pays 1% and four risky

All questions to be solved on excel

1. (33/25 points) Assume that investors can choose between a riskless asset that pays 1% and four risky assets whose return and variance-covariance matrix are as follows:

Risky Asset. Expected Return Variance-Covariance

1 7% 10% 3.6742% 1.4142%. -3.1620%

2 9%. 3.6742%. 15% 6.9282%. -1.9360%

3 12% 1.4142%. 6.9282%. 20%. 6.7082%

4 16% -3.1623%. -1.9365%. 6.7082%. 25%

a. Determine the market portfolio and the market price of risk.

b. Determine the Sharpe ratio for each risky asset.

c. Determine the CAPM asset beta for each risky asset.

2. (33/25 points) Alocac Co., is a consumer products firm whose stock exhibits the following sensitivities:

Response to Market Risk (Beta) = 0.75;

Response to Small minus Big Return (SMB) = 0.7;

Response to (High Value minus Low Value Return (HMB) = -0.334

Use the data (last 3 months values) from the Fama-French data library (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html) to derive an estimate of the required return on Alocac shares assuming a risk-free rate of 2 percent.
Alocac regularly pays out 80 percent of its earnings as dividends. This immediate year, it earned $3 per share. It expects to earn $3.06 per share next year as this would reflect its typical earnings growth. Does Alocac have valuable growth opportunities?
The current price of the Alocac is $20 per share. What price would you predict for it next year?

3. (33/25 points) Consider the following data for four firms: F1 through F4:

F1 F2 F3 F4 Market Bundle

Sensitivity to Market Premium 1.200 1.600 0.600 -0.587 1.000

Sensitivity to SMB -0.137 0.155 0.265. -0.145 0.000 Sensitivity to HML 0.000 2.113 -0.375 -0.211 0.000

Create a bundle of the four risky assets worth exactly 100% of your wealth with zero systematic risk from each of the three risk factors.
Create a bundle of the four risky assets worth exactly 100% of your wealth that duplicates the systematic risk of the Market Bundle.
Assume that the Market Risk Premium is 7% and that the risk-free rate is 3%. What is the expected return on a portfolio comprised of 50% the bundle in 3A and 50% the bundle in 3b?