п»їBUS 431a: Purchase and Profile Management

SPRING 2013, AUBG

Quiz 2(a)

Solution Guide

Problem you (5 points)

You happen to be face with probability circulation of the HPR on the wall street game index fund given in Spreadsheet 5. one particular in the book. Suppose that the risk-free rate of interest is 6% per year. You are considering investing $107. 55 within a 1-year COMPACT DISK and together buying a call option for the stock market index fund with an exercise cost of $110 and termination of 1 year. What is the probability distribution of your dollars return at the conclusion of the 12 months?

Solution:

The probability distribution of the buck return upon CD in addition call choice is:

State of the Overall economy

Probability

Year-end price of stock

Finishing Value of CD

Ending Value of Call

Total (combined) Value

Excellent

zero. 25

126. 50

money 114. 00

$16. 50

$130. 55

Good

0. 45

one hundred ten. 00

dollar 114. 00

$ zero. 00

$114. 00

Poor

0. 25

fifth there’s 89. 75

dollar 114. 00

$ zero. 00

$114. 00

Crash

0. 05

46. 00

$ 114. 00

money 0. 00

$114. 00

Note: The decision option will be executed as well as the stock account purchased only if the market price exceeds the exercise cost of $110.

Problem 2(5 points)

You manage a risky stock portfolio with anticipated return of 18% and standard deviation of 28%. The T-bill rate is usually 8%. Guess that your risky portfolio involves the following expense in the presented proportions: Stock A вЂ“ 25%; Share B: 32%; and Share C вЂ“ 43%. Precisely what are the expense proportions of your client's total portfolio, such as proportions in T-bills (30%)? What is the reward-to-variability rate (S) of your risky portfolio?

Solution:

Expenditure proportions:

40. 0% in T-bills

Dangerous portfolio

0. 7 Г— 25% =

17. 5% in Inventory A

0. 7 Г— 32% =

twenty two. 4% in Stock N

0. several Г— 43% =

30. 1% in Stock C

Your reward-to-volatility percentage:

Difficulty 3 (10 points): Consider the two investments listed below: Dangerous security: E(R) = 10%, Пѓ = 20%.

Free of risk security: Rf = 5%.

You wish to type a profile combining the risky protection and the...