HỌC VIỆN NGÂN HÀNG

KHOA TÀI CHÍNH

HỆ THỐNG BÀI TẬP

SECURITY ANALYSIS AND INVESTMENT

HỌ TÊN
MÃ SINH VIÊN
LỚP
NĂM HỌC

Hà Nội, ngày tháng năm

 CHAPTER 1
Exercise 1: On February 1, you bought 100 shares of stock in the Francesca Corporation for
$34 a share and a year later you sold it for $39 a share. During the year, you received a cash
dividend of $1.5 a share. Compute the holding period return on this Francesca stock
investment.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 2: At the beginning of last year, you invested $4000 in 80 shares of the Chang
corporation. During the year, Chang paid dividends of $5 per share. At the end of the year,
you sold 80 shares for $59 a share. Compute your total return on these shares and indicate how
much was due to the price change and how much was due to the dividend income.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 3: During the past 5 years, you owned two stocks that had the following annual rates
of return:
Year Stock T Stock B
1 0.19 0.08
2 0.08 0.03
3 -0.12 -0.09
4 -0.03 0.02
5 0.15 0.04
a. Compute the arithmetic mean annual rate of return for each stock.
b. Compute the standard deviation of the annual rate of return for each stock.
c. Compute the coefficient of variation for each stock. By this relative measure of risk,
which stock is preferable?
d. Compute the geometric mean rate of return for each stock. Discuss the difference
between the arithmetic mean return and the geometric mean return for each stock.

......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 4: You are considering acquiring shares of common stock in the Madison Beer
Corporation. Your rate of return expectations are as follows:
Possible rate of return Probability
-0.1 0.3
0.0 0.1
0.1 0.3
0.25 0.3
Compute the expected return E(Ri) on your investment in Madison Beer.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 5: Investor A considers to invest in one of 2 following common stocks.
Stock A Stock B
Probability Return Probability Return

0,4 12% 0,1 -5%

0,2 16% 0,4 9%
0,4 17% 0,3 18%
0,2 20%
Determine which stock that investor A should invest in?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 6: There are rates of return in the last 5 years of stock A
2003 2004 2005 2006 2007
5% -2% 4% 8% -1%
Determine variance and standard deviation of this stock?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 7: An investor invests 100 million dong in stock A. After 1 year, there are 3 possible
investment results as the following:
Probability Rate of return
Growth economy 0,3 80%
Stable economy 0,4 10%
Recession economy 0,3 -60%
a) Determine expected return of stock A?
b) Determine variance and standard deviation of stock A?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 8: An investor buys stock A at price $30. It is expected that 1 year later, stock A’s
price could be as the following:
Probability 0,2 0,3 0,5
Price 32 36 27
Determine variance, standard deviation of this stock?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 9: An investor buys 100 shares A at 30000 dong/ share. At the end of this year, he
buys more 100 shares A at 32000 dong/share. After 2 years, he sells all 200 share A at 34000
dong/ share. During these 2 years, this investor receives 2000 dong/ share per year. Determine
the average rate of return of this investor?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 10. Given the following information:
Stock A:
Scenario Probability Rate of return
1 0,3 0,6
2 0,25 0,7
3 0,25 -0,7
4 0,2 0,5
Stock B :
Scenario Probability Rate of return
1 0,4 0,6
2 0,6 0,7
Requirements:
Determine expected rate of return, variance, standard deviation, and coefficient of variation of
stock A and B? Which stock is more attractive?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 11: Given information about VN-Index:
Trading date VN-Index
3/1/2007 1123,07
4/2/2007 1055,1
5/2/2007 935,48
6/1/2007 1077,36
7/2/2007 994,17
8/1/2007 923,14
8/31/2007 908,37
9/28/2007 1046,86
10/31/2007 1065,09
11/30/2007 972,35
12/28/2007 927,02
Determine rate of return and variance of VN-Index in this period.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 12 : Stock X and Y have the possible returns in some scenario next year:
Scenario Probability Possible return of A (%) Possible return of B (%)
1 0,2 -10 9
2 0,4 17 -2
3 0,4 20 6
Determine:
a) Determine expected return of stock X and Y
b) Determine variance and standard deviation of these stocks?
c) Determine coefficient of variation of stock X and Y?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 13: Stock X and Y have the possible returns next year:
Scenario Probability Possible return Possible return
of A (%) of B (%)
1 0,1 -11 -5
2 0,35 15 10
3 0,55 18 16

a) Determine the expected return of stock X and Y

b) Determine variance and standard deviation of these stocks
c) Determine coefficient of variation of stock X and Y
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
 CHAPTER 2
Exercise 1: A bond with face value $1000, coupon rate 10%, 20 years to maturity. This bond
pays interest semi-annually. Determine this bond’s price if the required rate of return is 12%.
What is this bond’s price if the required rate of return is (i) 7%, (ii) 10%?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 2: Stock B has 10 years to maturity, face value $1000, coupon rate 9%/ year, pays
interest annually. This bond could be bought this bond back 5 years later. The call price is
$1100. This bond is sold at yield to maturity 8.2%/ year. Determine yield to call?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 3: 10 years ago, Apolo Company issued bonds with some features:
- Face value $1600.
- Coupon rate 9.6%/ year
- Paying interest semi-annually.
These bonds has 5 years to maturity and are sold at 98% of face value.
a) Determine yield to maturity?
b) Apolo company has financial trouble. It is believed that this company could afford all
interest payments. However, at maturity, this company could pay only 80% of face value.
Determine the real yield to maturity?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 4: Bond A has some features as following:
- Term to maturity: 10 years
- This bond was issued 6 years ago
- Face value is $1000
- Paying annual interest
 - Coupon rate 8%
- This bond is sold at $960
a. Determine yield to maturity of this bond?
b. Investor B considers to buy and hold this bond for 4 years. The 2 first periodic interests are
reinvested at 9%/ year to the end of the investment period. The 2 last interests are reinvested at
7%/ year to the end of the investment period. Determine the realized return?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 5: Bond A has face value $1000, coupon rate 8%, pays interest annually on April
15th . An investor decides to buy this bond at August 15th 20XY. At this time, this bond is
quoted at the price $1008. Determine the accrued interest and the bond price?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 6: A bond has 10 years to maturity, face value $1200, coupon rate 10%/year, pays
interest semi-annually. This bond was issued 6 years ago. The current required rate of return is
8%/ year.
a. Determine the current bond price
b. Determine the bond’s price 6 months later if the required rate of return is unchanged.
c. Determine rate of return for 6 month investment period of this investor.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 7: Assume that you purchased an 8%, 20 year, $1000 par, semiannual payment bond,
priced at $1012.5, when it has 12 years remaining until maturity. Compute:
a. Its promised yield to maturity
b. Its yield to call if the bond is callable in three years with an 8% premium
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 8: Calculate the Macaulay duration of an 8%, $1000 par bond that matures in three
years if the bond’s YTM is 10 percent and interest is paid semiannually.
a. Calculate this bond’s modified duration
b. Assuming the bond’s YTM goes from 10% to 9.5%, calculate an estimate of the price
change.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 9: A bond for the Chelle Corporation has the following characteristics:
Maturity- 12 years
Coupon-10%
Yield to maturity- 9.5%
Macaulay duration- 5.7%
Convexity- 48
Noncallable
a. Calculate the approximate price change for this bond using only its duration, assuming
its yield to maturity increased by 150 basis points. Discuss (without calculations) the
impact when you include the convexity effect.
b. Calculate the approximate price change for this bond (using only its duration) if its
yield to maturity declined by 300 basis points. Discuss (without calculations) what
would happen to your estimate of the price change if this was a callable bond.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 10: Bonds of Francesca Corporation with a par value of $1000 sell for $960, mature
in five years, and have a 7% annual coupon rate paid semiannually. Determine:
- Current yield ?
- Yield to maturity?
- Realized yield for an investor with a three- year holding period and a reinvestment rate
of 6% over the period. At the end of three years, the 7% coupon bonds with 2 years
remaining will sell to yield 7%.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 11: Bond A has the following features:
Face value: $1800
Maturity: 15 years
Paying interest semi-annually
Coupon rate: 7%
Yield to maturity 7%
Bond A could be called 6 years later at $1120.
a. Determine yield to call if this bond is going to be bought back 6 years later
b. Determine yield to call if this bond is going to be bought back after 4 years instead of 6
years.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 12: A bond with a par value of $1000, mature in 5 years, and have a 7% coupon rate
paid annually at 31/12. The transaction date is at 31/12/20X5. This bond is quoted at 98.1% of
face value. Determine total price that the buyer has to pay to buy this bond? .............................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 13: Bond of ABC Corporation with a par value of $1000, matures in 4 years, and has
a 6.5% coupon rate paid annually. This bond is sold at 7% yield to maturity. Determine:
a. Duration and modified duration
b. Bond price change based on duration and bond price change based on bond price
valuation method when the interest rate increases by 120 basic point
c. Convexity of this bond
 d. Bond price change based on duration and convexity when the interest rate increase by
120 basic point.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................

......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
 CHAPTER 3

Exercise 1. The investor is considering to invest in stock A. The most recent dividend was
3500 VND. In the next 2 years, the dividend will be 4000 VND and 4500 VND respectively.
After that, the growth rate of dividend will be 10%/year. If the required rate of return is 15%,
what should investor do if the current price of stock is 50000 VND.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 2. The most recent dividend of stock A is $1.5 per share. Stock analysists forecast:
- In the next 4 years, the growth rate dividend will be 15%/year
- From the 5th year, the growth rate of dividend will be stable at 12%/year.
- The required rate of return is 12%/year.
a) What is the value of this stock?
b) What is the value of this stock after 3 years, 5 years and 7 years (Assumptions: All
other factors don’t change
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 3. The most recent dividend of stock B is $2.0 per share. Stock analysists forecast:
- In the next 3 years, the growth rate dividend will be 18%/year
- From the 4th year, the growth rate of dividend will be stable at 11%/year.
- The required rate of return is 14%/year.
a) What is the value of this stock?
b) What should investor do if the current price of this stock is $52
c) What is the value of this stock after 3 years, 4 years and 8 years (Assumptions: Other
factors doesn’t change.)
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 4. The most recent dividend of stock A was $1.34 per share. Stock analysts forecast:
- In the next 4 years, the growth rate of dividend will be 18%/year
- In the next 6 years, the growth rate of dividend will be 14%/year
After that, the growth rate of dividend is stable at 11% to infinity.
What is the value of this tock if required rate of return is 12.8%/year?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 5. The most recent dividend of stock B was $1.8 per share. Stock analysts forecast:
- In the next 5 years, the growth rate of dividend will be 16%/year
- In the next 3 years, the growth rate of dividend will be 12%/year
After that, the growth rate of dividend is stable at 9% to infinity.
 What is the value of this tock if required rate of return is 11%/year?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 6. The most recent dividend of stock X was $2.1 per share. The require rate of return
is 10%/year. The growth rate of dividend will be stable at 8% to infinity. What is the
reasonable value of this stock?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 7. The most recent dividend of stock Y was $1.6 per share. The require rate of return
is 10%/year. Investor just bought this stock at $60. What is the expected growth rate of
dividend given that this growth rate will be stable to infinity?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 8. The expected dividend of stock X will be $3 per share. The require rate of return
is 12%/year. The growth rate of dividend will be stable at 10% to infinity. What is the
reasonable value of this stock?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 9. The most recent dividend of stock Y was $1.4 per share. The require rate of return
is 15%/year. The growth rate of dividend will be stable at 11% to infinity. What is the
reasonable value of this stock?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 10. The expected dividend of stock Z will be $2.5 per share. The require rate of
return is 16%/year. The growth rate of dividend will be stable at 12% to infinity. What is the
reasonable value of this stock?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
 CHAPTER 4

Exercise 1. Why do most investors hold diversified portfolios?

......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 2. Why do most assets of the same type show positive covariances of returns with
each other? Would you expect positive covariances of returns between different types of
assets such as returns on Treasury bills, General Electric common stock, and commercial
real estate? Why or why not?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 3. Explain the shape of the efficient frontier.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 4. Draw a properly labeled graph of the Markowitz efficient frontier. Describe the
efficient frontier in exact terms. Discuss the concept of dominant portfolios and show an
example of one on your graph.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 6. Assume you want to run a computer program to derive the efficient frontier
for your feasible set of stocks. What information must you input to the program?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 7. Why are investors’ utility curves important in portfolio theory?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 9. Explain how a given investor chooses an optimal portfolio. Will this choice
always be a diversified portfolio, or could it be a single asset? Explain your answer.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 10. Assume that you and a business associate develop an efficient frontier
for a set of investments. Why might the two of you select different portfolios on the
frontier?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 11. Stocks K, L, and M each have the same expected return and standard
deviation. The correlation coefficients between each pair of these stocks are:
K and L correlation coefficient = +0.8
K and M correlation coefficient = +0.2
L and M correlation coefficient = –0.4
Given these correlations, a portfolio constructed of which pair of stocks will have the lowest
standard deviation? Explain.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................

......................................................................................................................................................
......................................................................................................................................................

Exercise 12. Considering the world economic outlook for the coming year and estimates of
sales and earning for the pharmaceutical industry, you expect the rate of return for Lauren
Labs common stock to range between -20% and +40% with the following probabilities:
Probability Possible returns
0.10 -0.20
0.15 -0.05
0.20 0.10
0.25 0.15
0.2 0.2
0.1 0.4
Compute the expected rate of return E(Ri) for Lauren Labs.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 13. Given the following market value of stocks in your portfolio and their expected
rates of return, what is the expected rate of return for your common stock portfolio?
Stock Market value ($mil) E(Ri)
Disney 15000 0.14
Starbucks 17000 -0.04
Harley Davidson 32000 0.18
Intel 23000 0.16
Walgreens 7000 0.12
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 14. You are considering two assets with the following characteristics.
E(R1) = 15%; σ1 = 10%; w1 = 0.5
E(R2) = 20%; σ2 = 24%; w2 = 0.5
Compute the mean and standard deviation of two portfolios if ρ1,2 = 0.4 and -0.6, respectively.
Plot the two portfolios on a risk- return graph and briefly explain the results.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................

Exercise 15. We have the following information about the historical data of stock A and stock B:
Year Stock A Stock B
2017 20% 15%
2018 16% 27%
2019 30% -11%
2020 -10% 2%
2021 4% 7%
a) Determine the arithmetic average return and standard deviation of each stock?
b) Determine covariance and correlation between stock A and stock B?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 16. We have information of possible returns of stock C and stock D:
Possible return of Possible return of
Scenario Probability
stock C stock D
#1 0.4 10% -5%
#2 0.2 25% 15%
#3 0.4 5% 10%
a) Determine the arithmetic average return and standard deviation of each stock
b) Determine covariance and correlation between stock C and stock D
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 17. We have 5 investment opportunities.
Stock A B C D
Expected Return 15% 20% 10% 25%
Standard
10% 25% 12% 35%
deviation
If you are risk –neutral investor. Which asset do you choose to invest?
a) If you are risk – averse investor A = 4. Which asset do you choose to invest?
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Exercise 18. You are considering two assets with the following characteristics.
E(R1) = 10%; σ1 = 16%; w1 = 0.7
E(R2) = 15%; σ2 = 22%; w2 = 0.3
Compute the expected return and standard deviation of two portfolios if ρ1,2 = -1; 0.5; 0 or 1,
respectively.
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................