This is a course on Business/Economics/Finance Investments. I need help, with good thorough work. Well explained and detailed, done on time/as fast as possible too. All your workings and reasonings should make sense. Thanks!

Econ 1710 Investments I Fall 2016- KUO Homework #4: Chapter 6 Homework is due on Monday, October 3, 2016, handed in at either the START or the END of class. No late homework will be accepted as everyone is getting an extension due to Long Weekend. As stated on the syllabus, homework is graded on completion and good faith effort, determined at my discretion. Q1) Suppose that after graduating, you get a job managing your own equity portfolio. The following representing your expectations on how it will do in the future: State of the Market Boom Normal growth Recession Probability 0.40 0.35 0.25 HPR (including dividends) 9.8% 4.5% -11.0% 1a) What is the expected return and the standard deviation to this portfolio? 1b) Suppose that t-bills are currently paying 1.7% per year. What is the maximum level of risk aversion for which your portfolio is preferred to t-bills? 1c) Your parents are absolutely thrilled that you are running an equity fund and have decided to invest 70% of their savings in your fund and 30% in a money market fund (paying the same return as the t-bills). What is their expected return and standard deviation to their portfolio? 1d) What is the reward-to-volatility ratio (S) of your risky portfolio? What is the rewardto-volatility ratio for your parents? (Hint: Use your parents' portfolio from part 1c.) 1e) Draw the CAL of using your risky portfolio and the money market fund on an expected return-standard deviation graph, labeling the points F and P with the appropriate values of expected return and standard deviation on the axes. What is the slope of the CAL? Graph and label your parents' position with point X. 1f) It turns out that your parents have a coefficient of risk aversion A = 2.0. What proportion of their total investment should be invested in your fund? What is the expected value and standard deviation of the rate of return on your parents' (now) optimized portfolio? Q2) Suppose now that you get promoted to manage a different equity portfolio in the risky biotech sector. This time, your future expectations are that this portfolio will generate the following cash flows given the same probabilities of the state of the market from the above question: State of the Market Boom Normal growth Recession Probability 0.30 0.50 0.20 Cash Flow (at end of year) $900,000 $125,000 (-$650,000) Again, the risk-free investment in T-bills pays 1.7% per year. 2a) Your brother (\"the Big Shot\") says that he requires a risk premium of 14% before he would invest with you. How much would he be willing to pay for the portfolio? 2b) Suppose your portfolio can be purchased for the amount in (2a). What is its expected rate of return on the portfolio? 2c) Your parents think that your brother is being ridiculous and asking for too high of a risk premium. They think that a risk premium of 9% is reasonable. What price would they consider to be fair? 2d) Using your answers from the above parts, what can you say about the relationship between the (fair) price of the portfolio and required risk premia (plural of \"premium,\" based in Latin). Q3) There is way too much drama in your family and you decide that you will focus on wealth management for rich clients instead. You are managing another risky portfolio, which has the following stock holdings: Holdings Stock A Stock B Stock C % of risky portfolio 15% 30% 55% Expected return 13.5% 4.0% 8.2% The risk-free rate is 1.7%. 3a) Calculate the expected return for this portfolio. 3b) Your first client has devoted her total investment budget to pay for college for her children. After many discussions with you to figure out her risk tolerance, number of kids and the kind of colleges under consideration, she decides that an expected return in her overall portfolio of 6.5% should be sufficient to cover the likely college costs. She would like to achieve this by putting some of her money into your risky fund and the remainder in T-bills. What proportion should she invest in the risky portfolio and what proportion in the risk-free asset? 3c) What are the investment proportions of your client's overall portfolio, including the position in T-bills? 3d) Suppose the standard deviation of the risky portfolio is 8%. (Note that we do not have enough information to calculate this in our problem since we describe the expected returns of the portfolio's stock holdings but not the standard deviations of the stocks themselves). What will be the standard deviation of the rate of return on her portfolio? 3e) Another client wants the highest return possible subject to the constraint that you limit his standard deviation to be no more than 6%. Which client is more risk averse? Q4) The dirty secret is that although you (actively) manage a number of risky portfolios, you yourself invest in an S&P 500 index fund as your risky portfolio, in addition to money-market funds. Suppose that the S&P 500 index fund has an expected return of 10% with a standard deviation of 12% and the risk-free rate is 1.7%. In addition, your brokerage allows you to borrow at a margin interest rate of 6.4%. 4a) Draw a diagram of your CML, accounting for the higher borrowing rate. In addition, draw two sets of indifference curves on the CML, one indicating preferences so that the choice is to borrow, and the other indicating a choice of investing in both the index fund and the money market fund. 4b) What is the range of risk aversion for which you will neither borrow nor lend, that is for which y = 1? 4c) Suppose now that Mr. Big Shot (your brother) has created a risky portfolio and you have been guilt tripped into investing in it instead of the index fund. His risky portfolio has with an expected return of 9% and a standard deviation of 9%. Draw a diagram of your CAL (as in (4a), including the risk-free rate of 1.7%, the borrowing rate of 6.4%. Also include the two indifference curves that show the choice of borrowing and the choice of investing in both the risky portfolio and money market fund. 4d) In this case of investing in Big Shot's fund, what is the range of risk aversion for which you would neither borrow nor lend? END