Please answer the following finance questions. PLEASE SHOW AND PROVIDE EXPLANATI
ID: 2621598 • Letter: P
Question
Please answer the following finance questions. PLEASE SHOW AND PROVIDE EXPLANATIONS OF ALL WORK!
1. Sao Paulo Company has made a portfolio of these three securities :
Security____________Cost_______________E(R)________________Sigma(R)
Treasury Bond___$45,000___________4%_______________0
Salvador Corp.___$55,000___________15%_____________45%
Brasilia Corp.____$60,000___________17%_____________55%
The correlation coefficient between Salvador and Brasilia is 0.6.
(A) Find the expected return of the portfolio and its standard deviation.
(B) If the returns are normally distributed, find the probability that the return of the portfolio is more than 16%
2. Suppose you have $70,000 that you want to invest in two companies in the following table. Their correlation coefficient is 55%. Your portfolio should have a return of 14%
Security_______________Price/share_______________E(R)______________Sigma(R)
Manaus Oil Company_______$50__________________12%______________45%
Curitiba Copper Company___$60___________________15%______________55%
(A) Approximately how many shares of stock of each company should you buy?
(B) What is the sigma of the portfolio?
3. Rio de Janeiro Corporation's common stock sells for $173 a share and its current annual dividend is $16. The Beta of this stock is 1.5. It has shown 3% annual growth in dividends for many years. The current riskless rate is 4%. Today, the analysts downgraded the stock from "buy" to "hold". In response to the news, the stock dropped in price by $7 to $166 per share. Assume that the stock will maintain the growth in dividends. Write two equations and solve them simultaneously to calculate the following :
(A) The new Beta of the stock.
(B) Expected return of the market.
Explanation / Answer
2).
a) let share of Manaus Oil Company in venstment is x, then share of Curitiba Copper Company will be (1-x)
Exp return = 14%
so,
14 = 12x+15(1-x)
14 = 15-3x
x = 1/3
Investment in Manaus Oil Company = $(70000/3)
No of share brought = 70000/(50*3) = 466.67 shares
Ivestment in Curitiba Copper Company = 2*70000/3 = $(140000/3)
No of share brought = (140000/(60*3) = 777.78 shares
b) sigma of portfolio,
variance = ((1/3)^2)*(.45^2)+((2/3)^2)*(.55^2)+(2*(1/3)*(2/3)*.45*.55*.55) = .217444
Sigma of portfolio = .21744^.5 = .46630 = 46.630%
3)
to calculate old r
173 = 16*1.03/(r-.03)
r-.03 = 16*1.03/173
r = 12.526%
Now, using CAP, where Rm is return on market
12.526 = 4+1.5(Rm-4)
Rm = 9.684%
Now, according to New scenerio
166 = 16*1.03/(r-.03)
r = 12.927%
Using CAPM under new scenerio
12.927 = 4+B(9.684-4)
B = 1.57