fin3403 ch12 hw

Stocks tend to move together if they are affected by ________.

common economic events

Companies that sell household products and food have very little relation to the state of the economy because such basic needs do not go away. These stocks tend to have ________ betas.

low

Correlation is the degree to which the returns of two stocks share common risks.

true

If you build a large enough portfolio, you can diversify away all ________ risk, but you will be left with ________ risk.

unsystematic, systematic

For each 1% change in the market portfolio's excess return, the investment's excess return is expected to change by ________ due to risks that it has in common with the market.

beta

Suppose you invest in 100 shares of Harley-Davidson (HOG) at $40 per share and 230 shares of Yahoo (YHOO) at $25 per share. If the price of Harley-Davidson increases to $50 and the price of Yahoo decreases to $20 per share, what is the return on your portfolio?

-1.54% 100*40 = 4000 230*25 = 5750 4000 + 5750 = 9750 100*50 = 5000 230*20 = 4600 5000 + 4600 = 9600 (9750-9600)/9750 = -1.54%

A portfolio comprises Coke (beta of 1.6) and Wal-Mart (beta of 0.6). The amount invested in Coke is $10,000 and in Wal-Mart is $20,000. What is the beta of the portfolio?

0.93 10000 + 20000 = 30000 (10000/30000)(1.6) = 0.53 (20000/30000)(0.6) = 0.4 0.53 + 0.4 = 0.93

The beta of the market portfolio is ________.

1

A portfolio comprises Coke (beta of 1.4) and Wal-Mart (beta of 0.8). The amount invested in Coke is $20,000 and in Wal-Mart is $30,000. What is the beta of the portfolio?

1.04 20000 + 30000 = 50000 (20000/50000)(1.4) = 0.56 (30000/50000)(0.8) = 0.48 0.56 + 0.48 = 1.04

Your estimate of the market risk premium is 6%. The risk-free rate of return is 4%, and General Motors has a beta of 1.6. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

13.6% expected return = risk free + beta*MRP .04 + 1.6*.06 = 13.6%

The price of Microsoft is $37 per share and that of Apple is $43 per share. The price of Microsoft increases to $42 per share after one year and to $47 after two years. Also, shares of Apple increase to $49 after one year and to $59 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return in year 1 and year 2? Assume no dividends are paid.

13.75%; 16.48% Year 0 100*37 = 3700 100*43 = 4300 3700 + 4300 = 8000 Year 1 100*42 = 4200 100*49 = 4900 4200 + 4900 = 9100 (9100-8000)/8000 = 13.75% Year 2 100*47 = 4700 100*59 = 5900 4700 + 5900 = 10600 (10600-9100)/9100 = 16.48%

Your estimate of the market risk premium is 7%. The risk-free rate of return is 4%, and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

13.8% expected return = risk free + beta*MRP = .04 + 1.4*.07 = 13.8%

UPS, a delivery services company, has a beta of 1.6, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 6% and the market risk premium is 9%. What is the expected return on a portfolio with 40% of its money in UPS and the balance in Wal-Mart?

16.62% expected return = risk free + beta*MRP UPS- .06 + 1.6*.09 = 20.4% .204*.4 = 0.0816 Walmart- .06 + .9*.09 = 14.1 .141*.6 = .0846 0.0816 + 0.0846 = 16.62%

Suppose you invest in 110 shares of Merck (MRK) at $40 per share and 120 shares of Yahoo (YHOO) at $25 per share. If the price of Merck increases to $45 and the price of Yahoo decreases to $22 per share, what is the return on your portfolio?

2.57% 110*45 = 4950 120*22 = 2640 4950 + 2640 = 7590 110*40 = 4400 120*25 = 3000 4400 + 3000 = 7400 (7590-7400)/7400 = 2.57%

A portfolio has three stocks — 240 shares of Yahoo (YHOO), 150 Shares of General Motors (GM), and 40 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $30, the price of GM is $30, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM.

42.6%; 26.6% 240*30 = 7200 150*30 = 4500 40*130 = 5200 5200 + 4500 + 7200 = 16900 Find portfolio weight for YHOO and GM 7200/16900 = 42.6% 4500/16900 = 26.6%

A stock market comprises 4700 shares of stock A and 2300 shares of stock B. Assume the share prices for stocks A and B are $25 and $30, respectively. What proportion of the market portfolio is comprised of stock A?

63% Multiply the number of shares of each stock by its price and add the values. Thus, (4700 × $25) + (2300 × $30) = $186,500. Stock A is worth 4700 × $25 = $117,500; $117,500 / $186,500 = 63.0%

Your retirement portfolio comprises 200 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $134 and that of AGG is $110. If you expect the return on SPY to be 10% in the next year and the return on AGG to be 8%, what is the expected return for your retirement portfolio?

9.42% 200*134 = 26800 26800*.1 = 2680 100*110 = 11000 11000*.08 = 880 3560/37800 = 9.42%