PART A

MULTIPLE CHOICE QUESTIONS [30 marks; 2 each]

Record your answers to Part A on the Multiple Choice Answer Sheet.

Make sure you complete the form correctly and include your Student
Number.

……….

Choose the ONE best answer for each question. For numeric answers: (i)
work accurately, (ii) round final answer to same number of decimal
places as alternatives, (iii) then see if it matches (or is "none of the
above", where applicable)

A1. Suppose two managers, A and B, have strategies with the same expected
return, the same standard deviation, but manager A has a higher beta than
manager B. The M2 measure would say that:

a) A is better
b) B is better
c) A and B are the same
d) A takes more systematic risk than B
e) B takes more systematic risk than A

ANSWER:

(c) is correct.

A2. If the term structure is decreasing, the liquidity premium hypothesis where
liquidity premium is assumed to be positive and increasing with term implies

a) Expected future interest rates are increasing over time

b) Expected future interest rates are flat over time
c) Expected future interest rates are declining over time
d) Expected future interest rates could be increasing, flat or declining over time
e) Lenders prefer to lend over longer terms than borrowers prefer to borrow

ANSWER:

(c) See lecture notes.

1
A3. What is the interest rate (% pa) on a default-free zero-coupon bond currently
trading at $95.680 per $100 par value and maturing in 1.25 years?

a) 3.848%
b) 3.612%
c) 3.596%
d) 3.028%
e) 2.961%

ANSWER:

(c) (100/95.680)^(1/1.25)-1 = .03596

A4. For this question, you may assume CAPM holds. Which one of the following is
true?

a) Fairly priced stocks plot above the Security Market Line

b) You can build a portfolio with a beta of 0.25 by investing 75% of your money
in T-Bills and the rest in the market
c) Stocks with positive beta can deliver a negative risk premium, even if the
market risk premium is positive
d) Investors always demand a lower risk premium on assets with lower return
standard deviation
e) The risk-free asset is on the inefficient part of the minimum-variance frontier

ANSWER:

(b) is correct.

A5. The positive convexity of a non-callable bond implies that the decrease in
price corresponding to an increase in its yield to maturity

a) is greater than the price increase resulting from a decrease in yield of equal
magnitude.
b) is less than the price increase resulting from a decrease in yield of equal
magnitude.
c) is equal to the price increase resulting from a decrease in yield of equal
magnitude.
d) can be greater or less than the price increase resulting from a decrease in yield
of equal magnitude, depending on the frequency of coupon payments.
e) can be greater or less than the price increase resulting from a decrease in yield
of equal magnitude, depending on the coupon rate.

2
ANSWER:

(b) is correct.

A6. Consider a 5 year zero-coupon corporate bond which will default with
probability 0.9%. In the event of default, there is a 70% chance bondholders will
recoup 80% of the principal and a 30% chance they receive nothing. What is the
expected 5-year zero rate on this bond if its price per $100 of face value is
$78.530?

a) 2.096%
b) 3.860%
c) 3.923%
d) 4.520%
e) 4.869%

ANSWER:
1
∗ Par(1−b(1−rπ)) 1/𝑇 100(1−.009(1−.7∗.8)) 5
(e) z0T = ( P0
) −1=( 78.530
) = 4.869%

A7. If we pick portfolios at random, as the number of stocks per portfolio

decreases, the average portfolio variance

a) increases at an increasing rate

b) decreases at a decreasing rate
c) increases at a decreasing rate
d) decreases at an increasing rate
e) increases first but decreases later as the number of stocks gets very small

ANSWER:

(a) is correct.

A8. If the highest returns on a portfolio are obtained in times of largest

investments, the portfolio’s dollar-weighted return will be __________ its time-
weighted return.

3
 a) higher than
b) the same as
c) less than
d) exactly proportional to
e) more information is necessary to answer this question

ANSWER:

(a) See Lecture Notes for week 6.

A9. Which of the following statements is true?

I. The CAPM alpha and the Treynor Ratio always rank investments
identically.
II. The CAPM alpha and the Sharpe Ratio always rank investments
identically.
III. The Sharpe Ratio and M2 always rank investments identically.

a) I only
b) II only
c) III only
d) II and III
e) None of the statements are true

ANSWER:

(c) is correct.

A10. An Australian investor buys an Australian dollar-denominated floating rate

bond issued by BHP that promises to pay the 6-month T-note rate plus a spread
of 0.725%. The investor faces

a) Interest rate risk and inflation risk but not default risk.
b) Interest rate risk and default risk but not inflation risk.
c) Inflation risk but not interest rate risk or default risk.
d) Default risk and exchange rate risk but not interest rate risk.
e) Inflation risk and default risk but not exchange rate risk.

ANSWER:

4
(e) is correct. The firm can eventually default on the bond (which is why it pays a premium
on the T-note rate). Payments are in nominal terms, so subject to inflation risk. It is issued in
Australian dollars and the investor is Australian, so the investor faces no exchange rate risk.

A11. Two standard coupon bonds from the same issuer, with the same time to
maturity and coupon dates will have

I. the same yield;

II. the same duration.

a) Only I is true
b) Only II is true
c) Both I and II are true
d) I is true only if the bonds make semi-annual coupon payments
e) Without knowing the bonds’ coupon rates, we cannot determine whether I or
II is true

ANSWER:

(e) is correct

A12. Relative to the Markowitz approach, portfolio optimization based on the

Single Index Model (SIM) requires a ______ number of inputs; the optimal
portfolio derived from the SIM can be _______ to the one obtained from the
Markowitz model if we know the true expected returns and covariances.

a) smaller, superior
b) smaller, inferior
c) greater, superior
d) greater, inferior
e) smaller or greater (depending), inferior

ANSWER:

(b) is correct.

A13. Given the following term structure

Term Spot Rate

1 year 5.5%
2 years 5.0%

5
 3 years 4.0%

What is the one-year forward rate starting in two years?

a) 1.5%
b) 2.03%
c) 4.26%
d) 5.70%
e) 5.93%

ANSWER
1
1.043
(b) (1.052 ) − 1 = 0.02028

A14. Manager K is deciding between two alternative complete portfolios in which to

invest all of her fund’s money. In making her decision, K should compare the two
portfolios based on their:

a) information ratios
b) Jensen’s alphas
c) Sharpe ratios
d) Treynor ratios
e) Fama-French 3-factor’s alphas

ANSWER:

(c) is correct.

A15. Two US money market dealers agree to a transaction in a 90-day instrument

at a rate quoted at 3.1% pa. What is the instrument’s price per $100 par value?

a) $96.550
b) $97.571
c) $98.062
d) $99.225
e) $101.450

ANSWER:
90
(d) 100(1 − .031 360) = 99.225

6
 PART B

Question B1 [7 marks; 2-3-2]

The table below provides estimated features of Stock MUI and the market index.

Probability rMUI rASX200

State 1 x% -10% -6%
State 2 60% 20% 19%

The risk-free rate is 4%.

a) Calculate the expected returns for MUI and the ASX200

E_MUI 8%
E_ASX 9%

[Parts b) and c) follow on the next 2 pages]

7
b) Stock AZU has the same beta as MUI and an expected return of 8.5%. Assuming
the ASX200 is a suitable proxy for the market portfolio, what is the CAPM alpha of
AZU?

E_ASX 9%
COV_MUI_ASX 180
VAR_ASX 150
BETA 1.2
CAPM_Er_AZU 10.0
ALPHA -1.5%

Alternatively, BETA = (20-(-10))/(19-(-6)) = 30/25 = 1.2

[Part c) follows on the next page]

8
c) Consider the CAPM equilibrium result:

The risk premium on the market portfolio will be proportional to its risk and the
degree of risk aversion of the representative (“average”) investor:

𝐸[𝑟𝑀 ] − 𝑟𝑓 = 𝐴̅𝜎𝑀
2

Under this equilibrium, what is the representative investor’s optimal complete

portfolio weight in the risk-free asset?

The representative investor’s optimal complete portfolio weight in the market is

given by y=(E(r_M) –rf)/(A_bar*var(r_M))=1 by the equilibrium result above.

The representative investor’s optimal complete portfolio is simply 100% in the

Market. Thus, her weight in the risk-free asset is 0%.

9
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10
Question B2 [11 marks; 4-3-4]

a) Manuel is a rational investor whose risk preferences follow the utility function U =
E[r] − 0.5 × Aσ2 . He has decided to allocate his wealth of $100,000 between a
portfolio of risky assets and the risk-free asset. The standard deviation of the
portfolio of risky assets is 40% and its expected return is 25%. The risk-free rate is
7%. The expected return on Manuel’s complete portfolio is 20.5%. What is
Manuel’s coefficient of risk aversion?

The expected return on the optimal complete portfolio is:

E(r_C) = y* E(r_P) + (1- y*) r_f

Hence:

0.205 = y* 0.25 + (1- y*) 0.07

Which solves to give y* = 0.75

We then have:

y* = (E(r_P)-r_f)/(A σ^2_P) = (0.25-0.07)/(A(0.4)^2)

which solves to give A=1.5

[Parts b) and c) follow on the next 2 pages]

11
b) Stephanie collected 60 months of data on the risk-free rate, returns on the market
index and returns on the shares of WTW Ltd. She then ran the regression:

RWTW ( t ) = WTW + WTW RM ( t ) + eWTW ( t )

The regression output was:

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.774789605
R Square 0.600298933
Adjusted R
Square 0.593407535
Standard Error 0.017858447
Observations 60

ANOVA
Significance
df SS MS F F
Regression 1 0.027780984 0.027781 87.1084441 3.75662E-13
Residual 58 0.018497599 0.000319
Total 59 0.046278583
Standard
Coefficients Error t Stat P-value
Intercept 0.001086961 0.002403195 0.452298 0.6527414
X Variable 0.951835479 0.101983934 9.33319 3.7566E-13

Find the alpha of WTW and the standard deviation of its residuals. Can you say
with a high degree of (statistical) confidence, whether WTW is mispriced
according to the CAPM?

The monthly alpha of WTW is the intercept of the regression, equal to 0.00109, or 0.11%. [1
mark for either or both answers]

The standard deviation of the residuals is the regression’s standard error, 0.01786, or 1.786%
per month.

The P-value for the intercept is 0.65, and thus not statistically significant. Therefore, we
cannot confidently say that WTW’s alpha is different from 0 or, equivalently, that WTW is
mispriced according to the CAPM.

[Part c) follows on the next page]

12
c) If the market risk premium in Part b) above is 0.6% per month, compute the
monthly Sharpe ratio of a portfolio invested entirely in WTW (Hint: remember
2
that 𝑅 𝑠𝑞𝑢𝑎𝑟𝑒 = 𝛽𝑊𝑇𝑊 𝜎𝑅2𝑀 /𝜎𝑊𝑇𝑊
2 2
= 1 − 𝜎𝑒2𝑊𝑇𝑊 /𝜎𝑊𝑇𝑊 )

We need to compute the standard deviation of WTW. Given the formula for R square,

2
𝜎𝑒2𝑊𝑇𝑊 0.017862
𝜎𝑊𝑇𝑊 = = = 0.000798
1 − 𝑅𝑠𝑞𝑢𝑎𝑟𝑒 1 − 0.6003

2
Then, √𝜎𝑊𝑇𝑊 = 0.02825.

The monthly risk premium on WTW is

E[R_i] = alpha_i + beta_i E[R_M] = 0.001086961+0.951835479*0.006 = 0.0068

NOTE: you should also award full mark to a student that considers alpha to be not
statistically significantly different from zero: E[R_i] = 0+0.951835479*0.006 = 0.005711

The monthly Sharpe ratio of the portfolio is then 0.00680/0.02825 = 0.2407.

NOTE: if the student takes alpha=0, you should also award full mark to a student that
computes the Sharpe ratio of the portfolio as 0. 005711/0.02825 = 0.2022.

13
This page is left blank intentionally.

14
Question B3 [10 marks; 4-6]

Assume two risk-averse investors J and K who face the same minimum-variance
frontier. Given a risk-free rate 𝑟𝑓0 , each investor draws the same CAL to the tangency
portfolio T0 on the minimum-variance frontier. J is more risk averse than K, and his
optimal complete portfolio involves a long position in the risky portfolio T0 along
with lending at the risk-free rate 𝑟𝑓0 . K’s optimal complete portfolio involves a long
position in the risky portfolio T0 along with borrowing at the risk-free rate 𝑟𝑓0 .

a) Sketch a graph of the minimum-variance frontier, the CAL, as well as J’s and K’s
optimal complete portfolios along the CAL. Make sure to label everything
carefully.

ANSWER:

• Axis labelled appropriately (sigma on x-axis, E[r] on y-axis), M-V frontier plotted,
and CAL drawn from r_f to the tangent point on the M-V frontier
• J located to the left of T0
• K to the right of of T0

[Part b) follows on the next page]

15
b) Now suppose the risk-free rate suddenly drops to a new (lower) level 𝑟𝑓1 , such that
0 < 𝑟𝑓1 < 𝑟𝑓0, while the minimum-variance frontier remains the same. The new
level of the risk-free rate defines a new CAL tangent to a different tangency
portfolio T1. Assume that, along the new CAL, J is still a net lender and K is still a
net borrower at the risk-free rate 𝑟𝑓1 , and that both hold long positions in the
portfolio T1. Carefully explain:

(i) whether T1 will be to the left or to the right of T0;

(ii) whether you expect J and K to be better or worse off relative to the utility they
attain in part a).

ANSWER:

(i) The new tangency portfolio T1 is located to the left of T0.

(ii) At K’s initial optimal complete portfolio the lower borrowing rate should increase K’s
expected utility (higher expected return without an increase in risk). The new optimal
complete portfolio along the new CAL has to give K at least as high an expected utility as the
old portfolio, meaning that K should be better off..

For J, the opposite intuition holds: she is a net lender, so the lower interest rates negatively
affect her. If she is still a lender at the new risk-free rate, then we know that her new optimal
portfolio will lie below the initial CAL. She then derives lower expected utility (the new
portfolio has higher risk or lower expected return than a portfolio she could have chosen at
the original risk-free rate).

NOTE: A more mathematically inclined student can arrive at the same answers by plugging
in the optimal portfolio y* into the expected utility function for a mean-variance investor and
taking the partial derivative w.r.t. r_f:

𝜕𝐸[𝑢∗ ] 𝐸[𝑟𝑇 ] − 𝑟𝑓
=1− = 1 − 𝑦∗
𝜕𝑟𝑓 𝐴𝜎𝑇2

𝜕𝐸[𝑢∗ ] 𝜕𝐸[𝑢∗ ]
Thus 𝜕𝑟𝑓
> 0 for 𝑦 ∗ < 1, 𝜕𝑟𝑓
< 0 for 𝑦 ∗ > 1, so a decrease in r_f makes J worse off and K
better off. Full [4 marks] should be awarded to a student providing the right answer
following this alternative method.

16
Question B4 [7 marks; 4-3]

Assume that you are using a two-factor APT model, with factors A and B, to find the
fair expected return on a well-diversified portfolio Q that has an actual expected
return of 18%. Portfolio Q’s factor loadings (i.e., Q’s betas on each of the two factors)
and the factors’ risk premiums are shown in the table below. Portfolios for factors A
and B are tradable (i.e., you can take long or short positions in them). The risk-free
rate is 3.5%.

Factor Q’s factor Factor Risk Premium

loading (Beta)

A 1.4 12.0%

B 0.8 -3.5%

a) Is there an arbitrage opportunity in this economy? If so, what is the arbitrage

return (in %) per dollar bought/sold of Q ? Explain how you would attain this
arbitrage return, i.e., specify your net dollar position, per dollar traded in
portfolio Q, in each of the portfolios Q, A, B, and in the risk-free asset (e.g., “for
each dollar bought/sold of Q, buy/sell $X of A, etc.”)

ANSWER:

The fair expected return on Q is 3.5+1.4*12+0.8*-3.5=17.5%

Since the fair expected return is smaller than the actual expected return on Q, there is an
arbitrage opportunity in this economy. The arbitrage return per dollar bought/sold of Q is
the return you can attain by buying/selling Q and simultaneously taking the opposite
position in a replicating portfolio P with identical risk to Q. A portfolio P investing fractions
1.4, 0.8 and (1-1.4-0.8=) -1.2 in A, B and the risk-free asset, respectively, will replicate
portfolio Q and deliver an actual expected return of 17.5%.

Thus, you can attain an arbitrage profit of 18%-17.5% = 0.5% per dollar traded of Q, by
buying $1 of Q per $1 sold short of P.

The net positions in the arbitrage strategy would be as follows: for each dollar long Q, invest
$1.2 in the risk-free asset, and short $1.4 and $0.8, respectively, of portfolios A and B.

[Part b) follows on the next page]

17
 b) According to the APT, is it possible for the realised return on a given (well-
diversified) portfolio to differ from its SML’s return over a sequence of periods?
Explain.

ANSWER:

Yes. The SML’s return is an expected return. On average, we would expect the realised
returns to equal the expected returns, but in a single year, this is unlikely to be the case.
Thus, it is possible and in fact probable that the realised return on a well-diversified portfolio
in any given period(s) will not equal the expected return forecast by the SML.

18
Question B5 [8 marks; 4-4]

Over the past year, the ASX200 has returned 18.45% while the iShares Equity Yield
Maximiser ETF (YMAX) returned 16.24%. The risk-free rate was 2.5% and the beta
of YMAX was 0.8. Both the ASX200 and YMAX include only Australian-based firms.
Their respective compositions and sector-level returns were:

Industrials Energy
𝑤𝐴𝑆𝑋 45.0% 55.0%
𝑟𝐴𝑆𝑋 30.0% ??%
𝑤𝑌𝑀𝐴𝑋 ??% 46.0%
𝑟𝑌𝑀𝐴𝑋 19.0% 13.0%

a) Using the performance attribution method, how much (in % pa) of YMAX’s
underperformance was due to stock selection and how much to asset allocation?

ANSWER

YMAX’s weight in Industrials: 1-0.46=0.54

ASX’s return on Energy: (18.45%- .45*30%)/.55=9%

YMAX’s underperformance is 16.24%-18.45% = -2.21%

Contribution from asset allocation:

(54-45)*30 + (46-55)*9 =1.89%

Contribution from stock selection (could also be computed as -2.21-1.89=-4.1%):

54*(19-30) + 46*(13-9) = -4.1%

[Part b) follows on the next page]

19
b) An industry commentator that analyses YMAX writes in his blog: “based on the
recent unimpressive performance of YMAX, which I expect to continue in the
future, I recommend that investors sell all shares of YMAX in their active
portfolio.”

(i) Explain whether and why you agree (or not) with this analyst’s
recommendation.

(ii) What is the “luck of the draw” effect on portfolio performance evaluation and
how can it affect the analyst’s prediction about the future performance of YMAX?

ANSWER

(i) YMAX alpha is:

16.24-(2.5+.8(18.45-2.5)) =.98%>0.

Thus, according to the Treynor-Black approach, invesotrs should allocate a positive weight to
YMAX in their active portfolios.

(ii) Portfolio performance evaluation is affected by a luck of the draw effect because portfolio
returns are very noisy. Therefore, over any given sample, we might observe that YMAX
performed well even if its true expected performance is poor. Conversely, YMAX might
perform very poorly in-sample even if its expected performance is very high.

Both effects undermine all predictions (like this analyst’s) about YMAX future performance
based purely on its last-year (relative) returns.

20
Question B6 [7 marks; 3-4]

A one-year 10% Treasury bond with $100 par value pays coupons every quarter.
An investor bought this bond at a yield of 3% pa and is planning to keep the bond
until maturity, exactly one year from today. Coupon payments will be reinvested in
the bond. The bond is free from default risk.

a) As of the settlement date, is it possible to calculate with certainty the investor’s

holding period return on the bond? If yes, what is it (% pa)? If not, explain why.

ANSWER:

It is not possible to calculate the investor’s HPR with certainty.

The reason is that the holding period return is not locked in because the reinvestment rate is
not known at the time the bond is bought. Thus, as of the settlement date, it is not possible to
calculate the investor’s HPR with certainty.

[Part b) follows on the next page]

21
b) As of the settlement date, is it possible to calculate a minimum holding period
return the investor could achieve? If yes, what is it (% pa)? If not, explain why.

ANSWER:

The worst-case scenario for the investor is that interest rates will decrease to zero.

In this case you will have a sum of $110 in a year's time.

Given the 3% ytm, the price today is: 2.5*(1-(1.0075)^(-4))/.0075 + 100/(1.0075)^4=

106.87.

The HPR will be at least 110/106.87-1 = 2.93%.

NOTE: even if future reinvestment rates go negative, the investor can just keep the money in
a checking account and realise a minimum reinvestment rate of 0, so the HPR above still
holds.

22
Question B7 [8 marks; 6-2]

a) You observe the following rates:

𝑧01 = 4.0%

𝑧02 = 4.5%

𝑧03 = 4.8%

𝑓12 = 5.0%

𝑓13 = 5.5%

(i) Are the forward rates consistent with the zero rates?

(ii) Supposing you could borrow up to $100 million, how would you optimally invest
to take advantage of any potential inconsistency and what would be your profit?
Be precise in your answer. E.g., “At time t, Buy $x of Bond X, sell $y of Bond Y,
etc.”

ANSWER:

(i) Acc to the zero rates, the implied f_13 should be 5.2%, and thus is inconsistent with the
observed forward rate f_13

(ii) To take advantage of this mismatch, you could invest $100m for one year at z_01 and
continue to invest for two more years at f_13. Simultaneously, you would borrow $100m
for three years at z03.

The total interest you will earn is:

1.04*〖1.055〗^2-1 = 15.7546%

The interest you will owe is

1.048^3-1= 15.1023%

This will be a risk-free $100m * (15.7546% - 15.1023%) = $652,341

[Part b) follows on the next page]

23
b) For a 3-year Treasury bond making annual coupon payments, show that if the
yield to maturity ytm remains unchanged over the bond’s life, the holding
period rate of return over the first year, HPR01 will equal ytm. In your
proof, assume a general bond price Pt, coupon payment C, par value Par and yield
to maturity ytm.

ANSWER:

We have

𝑃1 +𝐶 − 𝑃0
𝐻𝑃𝑅01 =
𝑃0

𝐶 𝐶 + 𝑃𝑎𝑟
𝑃1 = +
1 + 𝑦𝑡𝑚 (1 + 𝑦𝑡𝑚)2

𝐶 𝐶 𝐶 + 𝑃𝑎𝑟
𝑃0 = + 2
+
1 + 𝑦𝑡𝑚 (1 + 𝑦𝑡𝑚) (1 + 𝑦𝑡𝑚)3

⟹ (1 + 𝑦𝑡𝑚)𝑃0 = 𝐶 + 𝑃1

𝑃1 +𝐶 − 𝑃0
⟹ 𝑦𝑡𝑚 = = 𝐻𝑃𝑅01
𝑃0

24
Question B8 [12 marks; 7-5]

Bondi Super plans to invest $100 million in a portfolio with a duration of 5 years
using two default-free zero-coupon bonds, X and Y. Bond X matures 2 years and six
months from today, while Bond Y matures 10 years from today. All bonds have a par
value of $1,000,000 and are currently priced to yield 5% pa.

a) How many of each bond should Bondi Super buy? Show your calculations

ANSWER:

The duration of bond X is 2.5.

The duration of bond Y is 10.

The portfolio weights are w invested in X and (1-w) in Y. They solve:

2.5w+10(1-w)=5,

which gives w = 2/3.

The amount invested in X = 2/3*$100m = $66,666,666.67

The amount invested in Y = 1/3*$100m = $33,333,333.33

Bond prices are:

P_X = $1,000,000/(1.05)^2.5 = $885,170.13

P_Y = $1,000,000/(1.05)^10 = $613,913.25

The number of bonds to be bought are:

q_X = $66,666,666.67/$885,170.13 = 75.32  75

q_Y = $33,333,333.33/$558,394.78 = 54.30  54

[Part b) follows on the next page]

25
b) Using a duration-based approximation, what would be the dollar profits and
losses (P&L) on the portfolio if all yields increase to 6% (parallel shift in the yield
curve) right after you form the portfolio? Recalculate the portfolio’s dollar P&L
using a convexity adjustment.

ANSWER:

The modified duration (MD) of the portfolio is

MD = 5/(1.05) = 4.7619

We can then approximate the $P&L using MD as:

$P&L  -4.7619×0.01×$100m = -$4,761,904.80

The computation of the convexity of the portfolio simplifies once we recognize that the CF
payments from bonds X and Y represents 2/3 and 1/3, respectively, of the value of the
portfolio. Therefore, the portfolio’s convexity is just:

Convexity = 1/(1.05)^2 × [(2.5^2+2.5) × 2/3 + (10^2+10) × 1/3] = 38.54875

The $P&L using the MD + Convexity approximation is then:

$P&L  (-4.7619×0.01 + 1/2×38.54875×(0.01)^2) ×$100m = -$4,569,161.00

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