Lois King

Module 3 Homework

FIN 3600

P6-c No, the answer does not depend on whether you sell the stock or hold it.
P6-19The standard deviations are in 1920s the stocks are 20%, bonds are 3.4% and bills
are 1.5% and in 1930s the stocks are 34.7%, bonds are 6% and the bills are 0.7%
P7-5

Stock A:
Expected Return= 0.15 X -0.2 + 0.65 X 0.18 +0.2 X 0.4 = 0.167
Variance = 0.15 x (-0.2 0.176)2 + 0.65 x (0.18 167)2 + 0.2 x (0.4
0.167)2
= .02020 + 0.00011 + 0.010858
= .0311
Standard Deviation = .1765 (17.65%)
Stock B:
Expected Return = 0.15 x -0.1 + 0.65 x 0.13 x 0.2 x 0.28 = 0.1255
Variance = 0.15 x (-0.1 0.1255)2 + 0.65 x (0.13 0.1255)2 + 0.2 x (.28
0.1255)2
= 0.00736 + 0.00013 + 0.004774
= 0.0124
Standard Deviation = 0.11 (11%)
Stock C:
Expected Return = 0.15 x -0.05 + 0.65 x 0.1 + 0.2 x 0.2 = 0.0975
Variance = 0.15 x (-0.05 0.0975)2 + 0.65 x (0.01 0.0975)2 + 0.2 x (0.2
0.0975)2
= 0.00326 + 0.00004 + 0.002101
= 0.005365
Standard deviation = 0.073 (7.3%)

P7-11 Total portfolio value = 4,000 + 6,000 + 12,000 + 3,000 = $25,000

Portfolio return = 4,000/25,000 x 18% + 6,000/ 25,000 x 8% +
12,000/25,000 x 16% + 3,000/25,000 x 12%
= 13.93%
P7-24R = Rf + B(Rm-Rf)
= 4 + 1.25 (10 4) + 11.5%
Return on stock: (33-30)/30 = 10%
Do not buy the stock. You expect a return of 10%. The stock should return 11.5%
according to the CAPM.