Leave all answers to 2-decimal places. Show work: you answer cells should have the embedded algebra or
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| Leave all answers to 2-decimal places. | ||||||||||
| Show work: you answer cells should have the embedded algebra or Excel function. | ||||||||||
| The following data applies to all questions in this assignment: | ||||||||||
| Rate of Return | ||||||||||
| Year | Asset A | Asset B | Market | |||||||
| 1 | 20.00% | 19.00% | 10.00% | |||||||
| 2 | -10.00% | 15.00% | 12.00% | |||||||
| 3 | 10.00% | -5.00% | 8.00% | |||||||
| 4 | -8.00% | -13.00% | -5.00% | |||||||
| 5 | 15.00% | 25.00% | 10.00% | |||||||
| 1) | Calculate the expected returns for Asset A, Asset B and the Market (use AVERAGE function in Excel). | |||||||||
| Asset A = | ||||||||||
| Asset B = | ||||||||||
| Market = | ||||||||||
| 2) | Calculate the standard deviation of returns, ?, for each asset (use STDEVP function). | |||||||||
| Asset A = | ||||||||||
| Asset B = | ||||||||||
| Market = | ||||||||||
| 3) | Calculate the coefficient of correlation, ?, between Asset A and Asset B (use CORREL function). | |||||||||
| ?A,B = | ||||||||||
| 4) | Using the following asset weight combinations between Asset A and B [0%-100%, 25%-75%, etc.] calculate the expected returns and their corresponding portfolio standard deviation of the portfolio with these weight combos. | |||||||||
| Use the following formula to calculate the portfolio standard deviation: | ||||||||||
| = | [(wA*?A)^2 + (wB*?B)^2 + (2 *wA * wB *?A * ?B *?(A,B))] ^0.5 | |||||||||
| where | wA and wB | are the % of assets in Asset A and B respectively [i.e. A-B weight combo], | ||||||||
| ?A and ?B | are the respective standard deviations of return [calculated from (2)] and | |||||||||
| ?(A,B) | is the [coefficient of] correlation of returns between asset A and B | |||||||||
| [calculated from (3)]. | ||||||||||
| Portfolio | Portfolio | |||||||||
| %Asset A | %Asset B | Expected Return | Standard Deviation | |||||||
| 0% | 100% | |||||||||
| 25% | 75% | |||||||||
| 50% | 50% | |||||||||
| 75% | 25% | |||||||||
| 100% | 0% | |||||||||
| 5) | Using Portfolio Expected Returns on the Y axis and Portfolio Standard Deviation in the X axis, draw the efficient frontier for possible portfolio combinations of Asset A and B [from previous question]. (include 100% A and 100% B as two possibilities). | |||||||||
| Hint: Use the Excel Chart Wizard and select the XY (scatter) plot option. | ||||||||||
| Yes, I am helping you auto-plot the Efficient Frontier below once you calculate the Return-Stdev in Question4. | ||||||||||
| When you calculate and fill in the portfolio's Expected Returns and Standard Deviations in (4), it will automatically plot below. It's probably a good idea to learn how to do it yourself, but for now it will save you some time ? | ||||||||||
| 6) | Calculate Beta for Asset A (relative to the Market) and Asset B (relative to the Market). (use the SLOPE function). | |||||||||
| [PS: this function is also available on your TI BA II Plus calculator, and Excel facility may or may not be available (it is semester- and instructor-specific) during the Exam]. | ||||||||||
| Beta Asset A = | ||||||||||
| Beta Asset B = | ||||||||||
| 7) | Assume that for next year the Risk Free Rate is expected to be 1% and that the overall Market will realize a return of 6%. Using the CAPM / SML methodology, calculate the required returns for Asset A and Asset B. | |||||||||
| CAPM: ki = kRF + ?i (kM - kRF) | ||||||||||
| kRF = | ||||||||||
| kM = | ||||||||||
| Required Return for Asset A = | ||||||||||
| Required Return for Asset B = | ||||||||||
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