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 AssetExpectedReturnVariance-Covariance

17% 10%. 3.6742% 1.4142%. -3.1620%

29%. 3.6742%. 15%. 6.9282%. -1.9360%

312% 1.4142%. 6.9282% 20%. 6.7082

416% -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

a.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.

b.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 it's typical earnings growth. Does Alocac have valuable growth opportunities?

c.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:

F1F2F3F4 Market Bundle

Sensitivity to Market Premium 1.200 1.600 0.600 -0.5871.000

Sensitivity to SMB -0.1370.1550.265.-0.145 0.000

Sensitivity to HML 0.000 2.113-0.375-0.2110.000

a.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.

b.Create a bundle of the four risky assets worth exactly 100% of your wealth that duplicates the systematic risk of the Market Bundle.

c.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?