Please answer all questions. 1) You have the following rates of return for a ris
ID: 2814102 • Letter: P
Question
Please answer all questions.
1) You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends.
What is the dollar-weighted return over the entire time period?
a 2.87%
b .74%
c 2.6%
d 2.21%
2) The stock of Business Adventures sells for $30 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:
a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 4%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
3) Assume that you manage a risky portfolio with an expected rate of return of 15% and a standard deviation of 29%. The T-bill rate is 5%
A client prefers to invest in your portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio's standard deviation will not exceed 20%.
a. What is the investment proportion, y? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Investment proportion y %
b. What is the expected rate of return on the overall portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Rate of return %
Dividend Stock Price Boom $2.80 $38 Normal economy 1.60 32 Recession .80 16# of Shares Bought or Sold 100 bought 50 bought 75 sold 75 sold Beginning Year 2011 2012 2013 2014 Year Price 50.00 $55.00 $51.00 54.00
Explanation / Answer
(1) Beginning of Year 2011 can be assumed to be the end of Year 0 or t = 0.Further, all share purchases can be considered as a cash/asset inflow(+) and all share sales can be considered as a cash/asset outflow(-).
At t = 0 : Share Price = $ 50 and Purchase Volume = 100
Cash Inflow = 50 x 100 = $ 5000 (+)
At t = 1 : Share Price = $ 55 and Purchase Volume = 50
Cash Inflow = 55 x 50 = $ 2750 (+)
At = 2 : Share Price = $ 51 and Sale Volume = 75
Cash Ouftlow = 51 x 75 = $ 3825 (-)
At = 3 : Share Price = $ 54 and Sale Volume = 75
Cash Outflow = 54 x 75 = $ 4050 (-)
The dollar weighted return is the internal rate of return of the aforementioned series of cash flows and is calculated as given below:
Let the dollar weighted return be K
Therefore, 5000 + 2750 / (1+K) = 3825 / (1+K)^(2) + 4050 / (1+K)^(3)
Using trial and error / Excel's GOAL SEEK function to solve the above equation, we get:
K = 0.00744 or 0.74 % approximately.
NOTE: Please raise separate qeuries for solutions to the remaining unrelated questions.