Name: ________________________________

MBA 8415 — MANAGERIAL FINANCE

Assignment 5: Due May 31, 2001 at the beginning of class Dr. David A. Stangeland

Do not round any intermediate calculations. Final dollar answers may be rounded to two decimal places (e.g.,
$125.89). Final % rate, standard deviation, and portfolio weight, answers may be rounded to 8 decimal places
(e.g., .12345678 or 12.345678%). Answer in the spaces provided.

1. PanCanadian Corp. stock was priced at $15 per share one year ago when you bought it. Today it just
paid a dividend of $2 and its current price is $14 per share.

a) The dollar return on your investment is $____________________________.

b) The percent return on your investment is ___________________________%.

c) If the risk-free rate of return over this time period is 5% then PanCanadian Corp had a risk premium of

___________________________%.

2. In the last six years, Manitoba Television Services (MTS) stock had the following returns:

Year 1 2 3 4 5 6
Return 100% -50% 40% -29% 60% -37.5%

a) The mean (or arithmetic average) annual return is _____________________________%.

b) The 6-year holding period return is ___________________________%.

c) The 6-year holding period return expressed as an effective rate per year
is__________________________%.

d) Which of the above returns best indicates how a 6-year investment in MTS performed?
________________

e) The sample variance of the yearly returns is ______________________

f) The sample standard deviation of returns is _______________________

Copyright  2002 David A. Stangeland

MBA 8415 — MANAGERIAL FINANCE
Assignment 5 Dr. David A. Stangeland
3. Use the data below to answer the following questions.
Security Expected Return Standard Deviation
1 .08 0
2 .10 .20
3 .20 .40

a) Assume 23 is -0.50 and your portfolio consists of securities 2 and 3.

Use calculus to determine the portfolio weights that will give you the minimum standard deviation
portfolio. Hint, substitute in (1-x3) for x2, then take the derivative of the portfolio variance with respect to
x3, set the derivative equal to zero and solve for x3, then solve for x2. If you cannot use calculus, use Excel
and the solver tool to determine the solution; again, express x2 as (1-x3) in your formula and then use
solver to solve for x2 that minimizes the result. Attach either the calculus derivation or the spreadsheet
(including solver output) to the submitted assignment.

i) x2 = ____________________%

ii) x3 = ____________________%

iii) The standard deviation of this portfolio is _______________________.

iv) Its expected return is _______________________%.

v) On the graph below, carefully plot the feasible set of portfolios of securities 2 and 3 (assuming
nonnegative weights for each security). Determine and plot at least five points.

Expected
Return

.20

.10

Standard
.20 .40
Deviation

Copyright  2002 David A. Stangeland Page 2 of 4

MBA 8415 — MANAGERIAL FINANCE
Assignment 5 Dr. David A. Stangeland
b) Now assume 23 is +1.0 and your portfolio consists of securities 2 and 3.

i) On the graph below, carefully plot the feasible set of portfolios of securities 2 and 3 (assuming
nonnegative weights for each security).

Expected
Return

.20

.10

Standard
.20 .40
Deviation

c) Suppose 23 is still +1.0 but now your portfolio can consist of all three securities.

i) On the graph below, carefully plot the feasible set of portfolios of securities 1, 2 and 3 (assuming
nonnegative weights for each security).

Expected
Return

.20

.10

Standard
.20 .40
Deviation

ii) Indicate on the above graph which of the possible portfolios a rational risk-averse investor might
consider choosing; i.e., which portfolios are efficient. Show which of the possible portfolios a
rational risk-averse investor would never consider choosing; i.e., which ones are dominated. Clearly
indicate your answers.

Copyright  2002 David A. Stangeland Page 3 of 4

MBA 8415 — MANAGERIAL FINANCE
Assignment 5 Dr. David A. Stangeland
d) Now assume 23 is -1.0 and your portfolio consists of securities 2 and 3.
Determine the portfolio weights that will give you the minimum standard deviation portfolio. Hint, no
calculus is necessary.

i) x2 = ____________________%

ii) x3 = ____________________%

iii) The standard deviation of this portfolio is _______________________.

iv) Its expected return is _______________________%.

v) On the graph below, carefully plot the feasible set of portfolios of securities 2 and 3 (assuming
nonnegative weights for each security).

Expected
Return

.20

.10

Standard
.20 .40
Deviation

vi) Find two sets of portfolio weights that result in a portfolio with standard deviation equal to 0.10.
Hint: the variance is 0.01; there are 2 square roots of 0.01 (one + and one -).

x2 = ____________________%

x3 = ____________________%

Or

x2 = ____________________%

x3 = ____________________%

vii) Which of the two portfolios with  = 0.10 (from vi) would you recommend to a rational risk-averse
investor? Explain very briefly.

Copyright  2002 David A. Stangeland Page 4 of 4