FIN$3361$ Business Finance II Assignment $1$ Total points: $32$

Name$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$ A Number $\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$1.$ Consider the following information $($show your calculations$)(10$ points$)$

Probability of State of Economy Stock A Stock B Stock C

Boom

$0\mathrm{.}20\mathrm{.}240\mathrm{.}360\mathrm{.}55$

Normal

$0\mathrm{.}550\mathrm{.}170\mathrm{.}130\mathrm{.}09$

Bust

$0\mathrm{.}250\mathrm{.}00-0\mathrm{.}28-0\mathrm{.}45$

a$.$ If your portfolio is invested $40\%$ each in A and B and $20\%$ in C$,$ what is the portfolio

expected return? The variance? The standard deviation?

b$.$ If the expected T$-$bill rate is $3\mathrm{.}8\%,$ what is the expected risk premium on the portfolio?

$2.$ As a fund manager, you want to construct a portfolio that is equally risky as the market

portfolio. You have $$1$ million to invest. The portfolio will consist of stock A$,$ B$,$ C and Tbills. Stock A has a beta of $0\mathrm{.}80$ with a $$185,000$ in the portfolio. Stock B has a beta of $1\mathrm{.}13$

with $$320,000$ in the portfolio. Stock C has a beta of $1\mathrm{.}29.$ Given the information above, how

much money you should allocate in Stock C and T$-$bills, respectively? Show your

calculations. $(10$ points$)$

$3.$ Stock Y has a beta of $1\mathrm{.}3$ and an expected return of $15\mathrm{.}3\%.$ Stock Z has a beta of $0\mathrm{.}7$ and an

expected return of $9\mathrm{.}3\%.$ If the risk$-$free rate is $5\mathrm{.}5\%$ and the market risk premium is $6\mathrm{.}8\%,$

are these stocks correctly priced? If not, underpriced or overpriced? Show your calculations.

$(6$ points$)$

$4.$ Consider the following information $($show your calculations$)$:

Security Beta E$($R$)$

A $1\mathrm{.}050\mathrm{.}11$

B $0\mathrm{.}800\mathrm{.}092$

Assume these securities are correctly priced. Based on the CAPM, what is the expected return on

the market portfolio? What is the risk$-$free rate? $(6$ points$)$Name

A Number

Consider the following information $($show your calculations$)(10$ points$)$

a$.$ If your portfolio is invested $40\%$ each in A and B and $20\%$ in C$,$ what is the portfolio

expected return? The variance? The standard deviation?

b$.$ If the expected T$-$bill rate is $3\mathrm{.}8\%,$ what is the expected risk premium on the portfolio?

As a fund manager, you want to construct a portfolio that is equally risky as the market

portfolio. You have $$1$ million to invest. The portfolio will consist of stock A$,$ B$,$ C and T$-$

bills. Stock A has a beta of $0\mathrm{.}80$ with a $$185,000$ in the portfolio. Stock B has a beta of $1\mathrm{.}13$

with $$320,000$ in the portfolio. Stock C has a beta of $1\mathrm{.}29.$ Given the information above, how

much money you should allocate in Stock C and T$-$bills, respectively? Show your

calculations. $(10$ points$)$

Stock $Y$ has a beta of $1\mathrm{.}3$ and an expected return of $15\mathrm{.}3\%.$ Stock $Z$ has a beta of $0\mathrm{.}7$ and an

expected return of $9\mathrm{.}3\%.$ If the risk$-$free rate is $5\mathrm{.}5\%$ and the market risk premium is $6\mathrm{.}8\%,$

are these stocks correctly priced? If not, underpriced or overpriced? Show your calculations.

$(6$ points$)$

Consider the following information $($show your calculations$)$:

Assume these securities are correctly priced. Based on the CAPM, what is the expected return on

the market portfolio? What is the risk$-$free rate? $(6$ points$)$