Cornell University

HADM 2250

Homework assignment 7

1)You own a portfolio that is 35 percent invested in Stock X, 20 percent in Stock Y, and 45 percent in Stock Z. The expected returns on these three stocks are 9 percent, 17 percent, and 13 percent, respectively. What is the expected return on the portfolio as a percentage, to 2 decimal places?

2. You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12 percent and Stock Y with an expected return of 9.5 percent. If your goal is to create a portfolio with an expected return of 11.1 percent, how much money will you invest in Stock X and Stock Y?

3. Consider the following information.

1. 1. Your portfolio is invested 30 percent in A, 40 percent in B, and 30 percent in C. What is the expected return of the portfolio (as a percentage, to 2 decimal places)?
   2. What is the variance of the portfolio (to 5 decimal places)?
   3. What is the standard deviation of the portfolio (as a percentage, to 2 decimal places)?

4. You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.27 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

5. A stock has a beta of 1.25 and an expected return of 14 percent. A risk-free asset currently earns

2.1 percent.

1. What is the expected return on a portfolio that is equally invested in the two assets as a percentage, to 2 decimal places?
2. If a portfolio of the two assets has a portfolio beta of 0.93, what are the portfolio weights (i.e. weight of the stock, and risk-free weight) to 4 decimal places?
3. If a portfolio of the two assets has an expected return of 9 percent, what is the portfolio beta

to 3 decimal places?

4. If a portfolio of the two assets has a beta of 2.50, what are the portfolio weights? Again, this means finding the weight of the stock, and the risk free weight.

6. Asset W has an expected return of 12.8 percent and a beta of 1.25. The risk-free rate is 4.1 percent.

1. 1. Complete the table above for portfolios of Asset W and a risk-free asset. Carefully observe the units and rounding specifications in the column titles and remember that these values are percentages, so give your answers accordingly.
   2. Calculate the slope of the line that results from plotting the relationship between Portfolio Expected Return and Portfolio Beta. Give your answer to 4 decimal places.

7. Stock Y has a beta of 1.3 and an expected return of 15.3 percent. Stock Z has a beta of 0.70 and an expected return of 9.3 percent. Suppose the risk-free rate is 5.5 percent and the market risk premium is 6.8 percent.

1. 1. Find the reward-to-risk ratios for Stock Y and Stock Z. Give your answers to 4 decimal places.
   2. Find the SML reward-to-risk ratio.
   3. Given your answers above, determine which stocks are overpriced or underpriced.

8. Stock Y has a beta of 1.3 and an expected return of 15.3 percent. Stock Z has a beta of 0.70 and an expected return of 9.3 percent. What would the risk-free rate have to be for the two stocks to be correctly priced? Give your answer as a percentage to 2 decimal places.

9. A portfolio is invested 40 percent in Stock A, 40 percent in Stock B, and 20 percent in Stock C. Assume the expected T-bill rate is 3.80 percent and the expected inflation rate is 3.50 percent. With the exception of variance (part b), give all answers as a percentage to 2 decimal places.

1. 1. Find the portfolio expected return.
   2. Find the variance. Please give your answer for this part to 5 decimal places.
   3. Find the standard deviation.
   4. Find the expected risk premium on the portfolio.
   5. Find the exact expected real return on the portfolio.
   6. Find the exact expected real risk premium on the portfolio?