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Assignment 3

The document contains a series of finance-related questions involving calculations of gains from short selling, returns, standard deviations, expected returns, covariance, and correlation coefficients. It also includes scenarios for investment decisions based on the Capital Asset Pricing Model (CAPM) and portfolio analysis. The questions require the application of financial concepts and formulas to derive specific numerical answers.

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jackyko0319
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4 views

Assignment 3

The document contains a series of finance-related questions involving calculations of gains from short selling, returns, standard deviations, expected returns, covariance, and correlation coefficients. It also includes scenarios for investment decisions based on the Capital Asset Pricing Model (CAPM) and portfolio analysis. The questions require the application of financial concepts and formulas to derive specific numerical answers.

Uploaded by

jackyko0319
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment 3 Qns

Note that for questions involving the CAPM and beta, assume the assumptions on using the
CAPM all hold.

1. Jonathan engaged in short selling of NTN stocks at $50 per share today. Suppose one week
later, the stock price is $38. What is the gain or loss for Jonathan a week later from this
position? Assume no transaction costs for the short selling trade.

Questions 2-3
You have observed the historical monthly returns of asset A:

Month Returns %

1 10
2 2
3 -2
4 0
5 5

2. What is the arithmetic mean return of this stock?

3. What is the standard deviation of returns of this stock?

4. You invested 300,000 in Nvidia and $700,000 in Tesla a year ago. Suppose the return of
Nvidia is 80% and the return of Tesla is 30% over the past year. What is the return on
your portfolio over the past year?

5. There are four portfolios below:

Portfolio Expected Return % Standard deviation %


A 8 22
B 15 25
C 15 29
D 18 15

The four portfolios are:


Portfolio A
Portfolio B
Portfolio C
Portfolio D

Assume the assumptions for the mean-variance rule hold. Which portfolio would you select
for investment?

1
Questions 6 - 7
Probability RETURN OF X(%) RETURN OF Y(%)
0.5 -5 -3
0.3 11 15
0.2 25 20

6. Calculate the covariance between X and Y.

7. Calculate the correlation coefficient between X and Y. Note that, in general, the
correlation coefficient ranges from – 1 to +1. Mathematically, -1 ≤ Correlation coefficient
≤ +1.
This means that Correlation coefficient ≥ -1, but ≤ +1.

8. GTech Corporation's stock has a required return of 13.00%, the risk-free rate is 5.00%, and
the market risk premium is 5.00%. Now suppose there is a shift in investor risk aversion,
and the market risk premium increases by 200 basis points or 2.00%. What is GTech's new
required return? 1 % = equals 100 basis points.

9. Your client wishes to know the value of an asset before he invests in it. He estimates that
the expected cash flows from the asset are $10,000 at the end of the first year, $15000 at
the end of the second year and $20,000 at the end of the third year. You advise him to use
the capital asset pricing model. The beta of the asset is 2. Expected return on the market is
10%. The risk-free rate is 4%. What is the value of the asset?

10. Suppose you have the following information:


Asset
State Probability A B
Boom 0.5 20% -5%
Bust 0.3 -10% 18%
Stable 0.2 8% 6%

You wish to invest 30% of your funds for investment in asset A and the rest in asset B.

Calculate the expected return and standard deviation of returns of the portfolio.

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