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Week 4 Problem Set

This document provides sample problems and solutions from various chapters in a finance textbook. It includes calculations for portfolio expected returns, stock price predictions, portfolio risk estimations, bond hedging strategies using futures contracts, and option strategy payoffs. The problems cover topics like portfolio theory, capital asset pricing model, futures hedging, and option payoff diagrams.

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Linh Thuy Nguyen
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296 views

Week 4 Problem Set

This document provides sample problems and solutions from various chapters in a finance textbook. It includes calculations for portfolio expected returns, stock price predictions, portfolio risk estimations, bond hedging strategies using futures contracts, and option strategy payoffs. The problems cover topics like portfolio theory, capital asset pricing model, futures hedging, and option payoff diagrams.

Uploaded by

Linh Thuy Nguyen
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Week 4 Problem Set Chapter 11 - #6 Calculate the expected return on a portfolio of 45 percent Roll and 55 percent Ross by filling

in the table on p. 376. P59

Chapter 12 - #9 A share of stock sells for $53 today. The beta of the stock is 1.2, and the expected return on the market is 12%. The stock is expected to pay a dividend of $1.10 in one year. If the risk- free rate is 5.5%, what will the share price be in one year?
9. E(Ri) = .045 + (.11 .045)(1.2) = .1230 Dividend yield = $1.20/$48 = .0229 Capital gains yield = .1230 .0229 = .1001 Price next year = $48(1 + .1001) = $52.80

Chapter 13 - #22 Your portfolio allocates equal amounts to three stocks. All three stocks have the same mean annual return of 16%. Annual return standard deviations for these three stocks are 30%, 40%, and 50%. The return correlations among all three stocks are zero. What is the smallest expected loss for your portfolio in the coming year with a probability of 1%?

22. E(R) = .16 = [(.3332)(.402) + (.3332)(.502) + (.3332)(.602) + 2(.333)(.333)(.40)(.50)(0) + 2(.333)(.333)(.40)(.60)(0) + 2(.333)(.333)(.50)(.60)(0)]1/2 = .2925 Prob(R .16 2.326(.2925)) = 1% Prob(R .5205) = 1%

Week 5 Problem Set Chapter 14 - #20 Suppose you want to hedge a $400 million bond portfolio with a duration of 4.3 years using 10year Treasury note futures with a duration of 6.7 years, a futures price of 102, and 3 months to expiration. The multiplier on Treasury note futures is $100,000. How many contracts do you buy or sell?
20. DF = 8.5 + (3/12) = 8.75 years Contracts to sell = (5.1 $900,000,000) / (8.75 1.03 $100,000) = 5,092.93 or about 5,093 contracts. 21. DF = 8 + (85/365) = 8.23 years Contracts to sell = (11.2 $400,000,000) / (8.23 1.02 $100,000) = 5,334.90 or about 5,335 contracts.

Chapter 15 - #24 Suppose you buy one SPX call option with a strike of 1400 and write one SPX put option with a strike of 1400. What are the payoffs at maturity to this position for S& P 500 Index levels of 1300, 1350, 1400, 1450, and 1500?

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