1- Richard must decide how to allocate the capital in his portfolio. Richard has
ID: 2621688 • Letter: 1
Question
1- Richard must decide how to allocate the capital in his portfolio.
Richard has
$36,000
available to invest. He finds the rates of
return for four stocks for the past 12 years and the results are given
below. Richard plans to invest 25% of his funds in each stock.
Year
Stock A (%)
Stock B (%)
Stock C (%)
Stock D (%)
1
-6.370
-0.930
2.580
-10.440
2
32.390
8.760
-7.110
47.700
3
26.490
7.285
-5.635
38.850
4
28.490
7.785
-6.135
41.850
5
-18.570
-3.980
5.630
-28.740
6
33.090
8.935
-7.285
48.750
7
71.790
18.610
-16.960
106.800
8
26.930
7.395
-5.745
39.510
9
14.030
4.170
-2.520
20.160
10
34.390
9.260
-7.610
50.700
11
-10.450
-1.950
3.600
-16.560
12
-2.570
0.020
1.630
-4.740
a) How much will he invest in each stock?$
b) The expected value of Richard's portfolio is: %
c) The standard deviation of Richard's portfolio is:%
2- Anna is a Vice President at the J Corporation. The company is considering
investing in a new factory and Anna must decide whether it is a feasible
project. In order to assess the viability of the project, Anna must first calculate
the rate of return that equity holders expect from the company stock. The
annual returns for J Corp. and for a market index are given below. Currently,
the risk-free rate of return is 1.8% and the market risk-premium is 7.4%.
a) What is the beta of J Corp.'s stock? 2 decimal places
b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year?
(Round your answer to one one-hundreth of a percent)
Year
J Corp. Return (%)
Market Return (%)
1
-1.83
-3.60
2
12.71
15.78
3
10.49
12.83
4
11.24
13.83
5
-6.41
-9.70
6
12.97
16.13
7
27.48
35.48
8
10.66
13.05
9
5.82
6.60
10
13.46
16.78
11
-3.36
-5.64
12
-0.40
-1.70
Refer to Questions 1 and 2. Richard has just received an unexpected
bonus at work worth
$9,000
and, given the J. Corp.'s reputation
for excellent investment decision making, he will invest all of the bonus
in J Corp. stock. Given the rates of return for stocks A, B, C, and D
presented in Question 1 and the rates of return for J Corp. stock and
the market presented in Question 2, as well as the cash amounts he
is investing in stocks A, B, C, and D as you determined in Question 1,
a) What is the beta of Richard's portfolio?
b) Richard's portfolio is
1- Richard must decide how to allocate the capital in his portfolio.
Richard has
$36,000
available to invest. He finds the rates of
return for four stocks for the past 12 years and the results are given
below. Richard plans to invest 25% of his funds in each stock.
Year
Stock A (%)
Stock B (%)
Stock C (%)
Stock D (%)
1
-6.370
-0.930
2.580
-10.440
2
32.390
8.760
-7.110
47.700
3
26.490
7.285
-5.635
38.850
4
28.490
7.785
-6.135
41.850
5
-18.570
-3.980
5.630
-28.740
6
33.090
8.935
-7.285
48.750
7
71.790
18.610
-16.960
106.800
8
26.930
7.395
-5.745
39.510
9
14.030
4.170
-2.520
20.160
10
34.390
9.260
-7.610
50.700
11
-10.450
-1.950
3.600
-16.560
12
-2.570
0.020
1.630
-4.740
a) How much will he invest in each stock?$
b) The expected value of Richard's portfolio is: %
c) The standard deviation of Richard's portfolio is:%
2- Anna is a Vice President at the J Corporation. The company is considering
investing in a new factory and Anna must decide whether it is a feasible
project. In order to assess the viability of the project, Anna must first calculate
the rate of return that equity holders expect from the company stock. The
annual returns for J Corp. and for a market index are given below. Currently,
the risk-free rate of return is 1.8% and the market risk-premium is 7.4%.
a) What is the beta of J Corp.'s stock? 2 decimal places
b) Using the CAPM model, what is the expected rate of return on J Corp. stock for the coming year?
(Round your answer to one one-hundreth of a percent)
Year
J Corp. Return (%)
Market Return (%)
1
-1.83
-3.60
2
12.71
15.78
3
10.49
12.83
4
11.24
13.83
5
-6.41
-9.70
6
12.97
16.13
7
27.48
35.48
8
10.66
13.05
9
5.82
6.60
10
13.46
16.78
11
-3.36
-5.64
12
-0.40
-1.70
Refer to Questions 1 and 2. Richard has just received an unexpected
bonus at work worth
$9,000
and, given the J. Corp.'s reputation
for excellent investment decision making, he will invest all of the bonus
in J Corp. stock. Given the rates of return for stocks A, B, C, and D
presented in Question 1 and the rates of return for J Corp. stock and
the market presented in Question 2, as well as the cash amounts he
is investing in stocks A, B, C, and D as you determined in Question 1,
Explanation / Answer
in bonus case do same as done in question 1
beta is defensive as it is less than 1
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