Suppose that you purchase $6,000 of security A and$18,000 of security B, and bor

Question

Suppose that you purchase $6,000 of security A and$18,000 of security B, and borrow $4,000 of fund C. These transactions constitute your entire portfolio. 1. Determine the portfolio weights for each component of the portfolio. (Keep 2 decimal places to your answers, e.g. xxx.12.) WA: ; WB 2. Assume that borrowing takes place at a risk-free interest rate of 5%. The following additional information is given: Varr) 0.36 0.25 E(r) 0.20 0.16 together with the correlation coefficient of A and B being 0.80. Compute the variance and expected rate of return of the portfolio. (Keep 4 decimal places to your answers, e.g. xxx.1234.) Expected rate of return 3. Determine how much money you can expect to receive at the end of the year with the investment. Variance: (Keep 2 decimal places to your answers, e.g. xxx.12.) Amount expected to receive:$

Explanation / Answer

1.

wa=6000/(6000+18000-4000)=0.3

wb=18000/(6000+18000-4000)=0.9

wc=-4000/(6000+18000-4000)=-0.2

2.

E(r)=0.3*20%+0.9*16%-0.2*5%=19.40%

Variance of fund=1.2^2*(0.25^2*0.36+0.75^2*0.25+2*0.25*0.75*sqrt(0.36*0.25)*0.8)=0.36

3.

Amount from investment

=6000*1.2+18000*1.16

=28080

Amount to be returned=4000*1.05=4200

Total net amount=28080-4200=23880

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.