GM4202 Financial Management
Professor Lena Booth
(Individual Homework Assignment)
This assignment will be graded. It must be turned in at the beginning of the class on the due date specified on the course page.
Answer all the 10 questions by showing your workings in the space provided. Please write legibly, or if you choose, type your answers.
Your Name: __________________________
ID Number: __________________________
Your Registered Class Time (Circle one):
1. BJ Enterprises was ...view middle of the document...
3. Your friend, a mutual fund manager, claims that her equity fund has an expected risk premium of 8% and an expected standard deviation of 16%. The rate on Treasury bills is 5%. You have $50,000. If you invest $40,000 of your money in your friend’s equity fund and $10,000 in a T-bill money market fund, what is the expected return and standard deviation of return on your portfolio?
4. Portfolio Z consists of 4 assets. Asset 1 has a beta of 0.8 and comprises 30% of the portfolio. Asset 2 has a beta of 1.1 and comprises 30% of the portfolio. Asset 3 has a beta of 1.5 and comprises 20% of the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the risk-free rate is expected to be 3% and the market risk premium is 7%, what is
a. the beta of Portfolio Z?
b. the expected return on Portfolio Z?
c. the expected return on the market portfolio?
5. A security has an expected return of 12% and a standard deviation of 4.5%. If the security’s returns are normally distributed, what is the range of returns
a. about 68% of the time?
b. about 95% of the time?
6. A share of stock with a beta of 0.75 now sells for $50. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 4%, and the market risk premium is perceived to be 8%. What is the investors’ expectation of the price of the stock at the end of the year?
7. You are an investor in common stock and currently hold a well-diversified portfolio that has an expected return of 10% with a beta of 1.2. You plan to buy 100 shares of AT&E at $10 a share. AT&E has an expected return of 20% with a beta of 2.0. The total value of your current portfolio is $9,000. What will be the expected return and beta of the portfolio after the purchase of the new stock?
8. Your friend has a well-diversified portfolio that invests mainly in the blue chip stocks. His portfolio...