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Assignment 6 - Jaime Lievano

The document contains solutions to investment portfolio questions. It calculates portfolio weights, expected returns, betas, variance and standard deviation for portfolios consisting of multiple stocks. It also uses the Capital Asset Pricing Model to solve for risk-free rates.

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Jaime Lievano
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32 views7 pages

Assignment 6 - Jaime Lievano

The document contains solutions to investment portfolio questions. It calculates portfolio weights, expected returns, betas, variance and standard deviation for portfolios consisting of multiple stocks. It also uses the Capital Asset Pricing Model to solve for risk-free rates.

Uploaded by

Jaime Lievano
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1

Assignment 6

Jaime Lievano (2205932)


University Canada West
FNCE 623: Financial Management
Professor Sujatha Selvaraj
March 13th, 2023
2

Chapter 13

1. Question 1

What are the portfolio weights for a portfolio that has 135 shares of Stock A that sell for
$48 per share and 165 shares of Stock B that sell for S29 per share?

Using the formulas:


Portvalue = (ShA * ShprA) + ( ShB * ShprB)
WA = (ShA * ShprA) / Portvalue
WB = (ShB * ShprB) / Portvalue

Shares of A
Shares Price of A
Shares of B
Shares Price of B

Portvalue = (135 * $48) + (165 * $29) = $11,265


WA = (135 * $48) / $11,265 = 0.5752
WB = (165 * $29) / $11,265 = 0.4248

Based on the formula, the weights for Stock A and Stock B, are 0.5752 and 0.4248 respectively.

2. Question 4

You have S 10,000 to invest in a stock portfolio. Your choices are Stock X with an
expected return of 11.5% and Stock Y with an expected return of 9.4%. If your goal is to create a
portfolio with an expected return of 10.85%. how much money Will you invest in Stock X? In
Stock Y?

Using the formulas:


rp = (rx * wx) + ( ry * wy)
rx = 11.5%
ry = 9.4%
wy = (1 - wx)
rp = (rx * wx) + ( ry * (1 -
wx))
rp = (0.115wx + 0.094 -
3

0.094wx)
0.1085 - 0.094 = 0.021wx
wx = 0.69
wy = (1 - 0.69) = 0.31

The amount invested in x is


x = $10,000 x 0.69 = $6,900
The amount invested in y is
y = $10,000 x 0.31 = $3,100

3. Question 6

Based on the following information. calculate the expected return:

Er = 0.1 x -0.18 + 0.6 x 0.11 + 0.3 x 0.26


Er = -0.018 + 0.066 + 0.078
Er = 0.126

Based on the formula, the expected return is 0.126


4

4. Question 10

Consider the following information:

a. Your portfolio is invested 30% each in A and C, and 40% in B. What is the expected return of
the portfolio?
b. What is the variance of this portfolio? The standard deviation?

Percentage investment 0.3 0.4 0.3


Probability of
State of Stock Stoc Stoc Portfolio
State of Er Squared Dev
Economy A kB kC Return
Economy
Recessio 3.66
0.1 0.35 0.45 0.27 36.60% 0.0779 0.0077
n %
6.72
Good 0.6 0.16 0.1 0.08 11.20% 0.00063 0.0003
%
-
Poor 0.25 -0.01 -0.06 -0.04 -3.90% 0.98 0.01585 0.0036
%
-
Bust 0.05 -0.12 -0.2 -0.09 -14.30% 0.72 0.05285 0.0026
%
Expected 8.69 Varianc
0.0148
Return % e
12.15
Std Dev
%

5. Question 12

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the
stocks has a beta of 1.32 and the total portfolio is equally as risky as the market, what must the
beta be for the other stock in your portfolio?
5

Since market beta must be equal to 1, the following formula must be used for this exercise

MB= 1/3 x 0 + 1/3 x 1.32 + 1/3 x BStck


MB= 0.44 + 1/3 x BStck
1- 0.44 = 1/3 x BStck
1- 0.44 = 1/3 x BStck
0.56 x 3 = BStck
Bstck = 1.68

The beta for the other stock in the portfolio must be 1.68.

6. Question 16

A stock has an expected return of 12.15%, its beta is 1.31, and the expected return on the market
is 10.2%. What must the risk-free rate be?
The risk-free rate can be calculated through the capital asset pricing model CAPM:
Er = Rfr+ Beta (Mrkt Rr- Rfr)
Rfr= Risk free rate
12.15 = Rfr + 1.31 (10.2 - Rfr)
12.15 - 13.362 = Rfr - 1.31 x Rfr
Rfr = (1.212 / 0.31) = 3.91
The risk-free rate is 3.91%

7. Question 24

You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest.
Given this information, fill in the rest of the following table:
6

Rfr = $1,000,000 - ($185,000 + $320,000 + x)


Rfr = $1,000,000 - ($185,000 + $320,000 + x)
Rfr = $495,000 - x
Pb = beta x Inv Weight
1 = ($185,000 / $1,000,000 x 0.8) + ($320,000 / $1,000,000 x 1.13) + x / $1,000,000 x 1.29 +
( $495000 - x) / $1,000,000
x = $380.155
Investment c = $ 380,155
To calculate the investment in Rfr we have to replace.
Rfr = $495,000 - x
Rfr = $495,000 - $388,155
Rfr = $114.845
7

List of References

Cepf, T. T. B. (2023, March 9). Capital Asset Pricing Model (CAPM) | Overview and Formula.
Finance Strategist.
https://www.financestrategists.com/wealth-management/valuation/capital-asset-pricing-
model/?
gclid=Cj0KCQjwk7ugBhDIARIsAGuvgPbgNs4QlAWPWO1PaHmKX8kRjaIjK8eHOH
cVOyM-NO8gCzZsMR1u1_4aAgk1EALw_wcB
Hanweck Portfolio Margin. (n.d.).
https://www.cboe.com/services/analytics/hanweck/portfolio_margin/?
&utm_term=portfolio
%20analytics&utm_campaign=Hedge+Fund&utm_source=adwords&utm_medium=ppc
&hsa_acc=4153808511&hsa_net=adwords&hsa_cam=1470185883&hsa_ad=469059225
066&hsa_kw=portfolio
%20analytics&hsa_grp=114576493092&hsa_mt=p&hsa_ver=3&hsa_src=g&hsa_tgt=kw
d-298733976373&gclid=Cj0KCQjwk7ugBhDIARIsAGuvgPZ486Rjcp0tq9PEvsLt68K-
yhHxaIhn8k0bi6frnlXWOHaSNvst24saAv6kEALw_wcB&gclsrc=aw.ds
Standard deviation. (n.d.). https://www.math.net/standard-deviation
Ross, A. (2023). Fundamentals of corporate finance. McGraw Hill. Tenth Canadian Edition.

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