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1 1. BD12a Tday is a day in July 2525 and a bnd with annual cupn rate f 3.70% just yesterday paid a cupn. The bnd matures in January 2539 and its quted bnd price is percent f par (semiannual cmpunding). Find the current yield and capital gains yield.

2 2.1. BD9 The cmpany tday issues a 20-year $1,000 bnd that carries a 4.90% annual cupn rate (semiannual cupns). Find the ttal interest that the cmpany expects t pay ver the lifetime f the bnd BD16b Tday is a day in August 2525 and a bnd with annual yield-t-maturity f 8.80% just yesterday paid a cupn. The bnd matures in August 2538 and its quted bnd price is percent f par (semiannual cmpunding). Find the annual cupn rate and tday's current yield. First find the payment amunt

3 2.3. BD17b Tday is a day in September 2525 and a bnd with annual yield-t-maturity f 9.90% just yesterday paid a cupn. The bnd matures in September 2545 and its quted bnd price tday is percent f par (semiannual cmpunding). Cntrast the annual capital gains yield tday with the annual capital gains yield fr the six mnths that cnclude with September 2545 (assume scientific amrtizatin and cnstant YTM). First find the payment amunt Next find the current yield Then find the price when six mnths is left Then cmpute the future current yield

4 2.4. BD18 Bnd X has annual cupn rate f 7.80%, 10 cupns remain until maturity, and its price is $880. Premium bnd Z with price f $1,120 als has 10 cupns remaining. Which statement best describes whether the yield-t-maturity is larger fr bnd X r fr Z? a. If the cupn rate fr Z is smaller than 11.7% then X definitely has the bigger YTM b. If the cupn rate fr Z is smaller than 17.1% then X definitely has the smaller YTM c. If the cupn rate fr Z equals 11.7% then X and Z have the same YTM d. Tw chices, B and C, are crrect e. The three A-B-C chices are all crrect First calculate the yield t maturity fr bnd X Next, calculate the YTM fr bnd Z at different cupn rates Because at a cupn rate f 11.7% Z s YTM is smaller then Z s YTM will be smaller at any smaller cupn rate as well. A is crrect.

5 3. BD19b A bnd with annual cupn rate f 9.10% and price f $830 just yesterday paid a cupn. A ttal f 30 cupns remain t be paid. Suppse yu buy the bnd at tday's price, hld it and receive 10 cupns, and then sell the bnd. When yu sell the bnd its yield-t-maturity has decreased a ttal f 25 basis pints. Find the bnd selling price and annual rate f return thrughut the investment hrizn. First calculate the yield t maturity fr the bnd ver the full perid Then calculate the price after 10 cupns have been paid Finally, calculate the yield t maturity fr the bnd ver the hlding perid

6 4. BD5c The yield-t-maturity fr a zer cupn bnd is 6.30% fr a 1-year bnd, 7.28% fr a 2-year bnd, and 7.68% fr a 3-year bnd. Yu think the yield curve will remain the same thrughut the future. Yu wish t make a 1-year investment, that is, buy a bnd tday and sell it in ne year. Yu can pursue three alternative strategies, call them S1, S2, and S3. Fr strategy S1, yu buy the 1-year bnd and hld it t maturity, in which case yur annual rate f return bviusly is 6.30%. Fr S2, buy a 2-year bnd tday and sell it when it has 1 year remaining t maturity. Fr S3, buy a 3-year bnd tday and sell it when it has 2 years remaining t maturity. What are yur average annual rates f return fr strategies S2 and S3? (Assume, if necessary, that yu can buy fractins f bnds.) First calculate the price fr all three bnds Then calculate the rate f return ver the hlding perid frm 2 t 1 and frm 3 t 2

7 5.1. TR39 Which statement is the best descriptin fr a bnd investment f the relatin between the prmised yield-t-maturity and the actual ex pst rate f return? Accurate Statements The actual ex pst ROR equals the prmised yield-t-maturity when yu wn the bnd until maturity and receive all expected cash flws. The actual ex pst ROR equals the prmised yield-t-maturity when yu sell a bnd befre it matures and the YTM at time f sale is the same as when it was purchased. The actual ex pst ROR exceeds the prmised yield-t-maturity when yu sell a bnd befre it matures and the YTM at time f sale is less than the YTM when it was purchased MB7 Which statement abut bnd prices is mst accurate? Accurate Statements Fr a premium bnd the yield-t-maturity is less than the cupn rate With an interest rate decline the price rises mre fr lng-term bnds than fr shrt-term bnds When a bnd is sld at an interest rate less than the initial yield t maturity then the actual rate f return exceeds the prmised yield Fr a discunt bnd the cupn rate is less than the yield t maturity 5.3. MB19 Which characteristic best describes the Treasury yield curve? Accurate Statement The curve nrmally begins with a steep upward slpe that flattens tward the right 5.4. MB24 The largest financial markets in the U.S.A. include the bnd market and the stck market. One f these markets, hwever, is significantly larger than the ther market. Decide whether this statement is true r false: On an average day the dllar trading vlume f all stcks traded in the U.S.A. is significantly greater than the dllar trading vlume f all bnds in the U.S.A. False On an average day the dllar trading vlume f all stcks traded in the U.S.A. is significantly less than the dllar trading vlume f all bnds in the U.S.A. True

8 6. TK4 At the clse f market yesterday the 10-day and 2-day mving average share prices fr the cmpany stck were $22.75 and $24.75, respectively. The share prices 10 and 2 days ag were $18.25 and $24.50, respectively. Accrding t a trading rule that generates a signal when the 2-day mving average crsses the 10-day mving average, what wuld be tday's crss-ver stck price that generates a signal reversal? T answer the questin set the new 10 day mving average equal t the new 2 day mving average and slve fr P algebraically

9 7. ST20 The stck fr a start-up cmpany prbably will pay n dividends until exactly 6 years frm tday. At that time it will pay $5.20 per year frever. Yu assess the intrinsic value f the stck with a 8.9% discunt rate. Find the stck's intrinsic value tday. First find the intrinsic value 5 years frm nw Then discunt that price back t its present value Answer = 38.15

10 8.1. ST12 A stck yu are buying tday prmises n dividends fr a lng time. In exactly 7 years yu expect the stck will pay its first annual dividend f $3.90. At that time, yu als believe that the stck culd be sld fr $ If tday yu can buy the stck fr $13.23, what is the expected annual rate f return n the stck investment? 8.2. ST21 A stck yu are buying tday prmises n dividends fr a lng time. In exactly 6 years yu expect the stck will pay its first annual dividend f $6.80, which yu expect will be paid annually frever. If tday yu can buy the stck fr $35.23, what is the expected annual rate f return n the stck investment? Slve this using the CF functin Cmpute IRR = ST22 The cmpany preferred stck pays a $6.00 annual dividend. The lcal bank pays 3.9% interest (cmpunded annually) n 5-year CDs. Yu cnsider the preferred stck an attractive investment if its ROR is 350 basis pints mre than the CD rate. Find yur assessment f the preferred stck intrinsic value.

11 8.4. ST24 The cmpany preferred stck yesterday paid $5.20 annual dividend and tday's stck price is $ The lcal bank pays 4.1% interest n CDs. Yu cnsider the preferred stck an attractive investment if its ROR is 150 basis pints mre than the CD rate. Find the actual risk premium and is this stck a buy r a sell? s the stck is a sell

12 9. ST8 The cmpany just paid its annual dividend f $3.75. Yu believe the dividend will grw perpetually at 8.0% per annum. Tday's price-t-earnings rati is 18.2 and the payut rati always equals 60%. Yu assess intrinsic value with a 13.2% discunt rate. Find the ne-year rate f return frm buying the stck tday and hlding it ne year, given that next year's share price cnverges t next year's intrinsic value.

13 10. ST25 The cmpany preferred stck just yesterday paid its annual dividend f $2.00 per share. Tday's share price is $ Yu believe the dividend yield is abnrmally high but that it will revert t its nrmal value f 8.40%. Yur strategy is t buy the stck tday and receive annual dividends fr 3 years. Upn receiving the last dividend yu expect the dividend yield will be nrmal. Yur strategy is t sell the stck at that time. Cmpute the expected annual rate f return fr the strategy.

14 11.1. TR18 The dividend grwth valuatin mdel equates intrinsic value t the discunted sum f the perpetual and smthly grwing dividend stream. When the dividend grwth rate (g) exceeds the discunt rate (r) the frmula gives an intrinsic value that is a negative number. Determine whether the fllwing interpretatin f the preceding fact is TRUE r FALSE: the stck has an infinite intrinsic value. True TR22 Accrding t the cnstant grwth dividend valuatin mdel, the ttal rate f return partitins int the expected dividend yield and the capital gains yield. Which statement is the mst accurate descriptin f the partitin? Accurate Statements the lng-run average dividend yield is smaller than the capital gains yield the dividend yield is mre predictable and less risky than the capital gains yield usually the dividend cmpnent is a realized cash flw whereas the capital gains yield is an accrued cash flw the ttal rate f return minus the expected dividend yield equals the capital gains yield the dividends are usually taxable in the year received whereas capital gains are tax deferred TR34 A mainstay f technical analysis is cmparisn f mving averages with different lengths. Is the fllwing statement f the mving average trading strategy True r False: A sell signal results when the shrt-run mving average becmes bigger than the lng-run mving average. False True r False: A buy signal results when the shrt-run mving average becmes smaller than the lng-run mving average. False True r False: A sell signal results when the shrt-run mving average becmes smaller than the lng-run mving average. True

15 11.4. TR40 The dividend grwth valuatin mdel equates a stck's intrinsic value t the discunted sum f the perpetual and smthly grwing dividend stream. The relatin between the dividend grwth rate (g) and the discunt rate (r) is very imprtant. Which statement accurately describes that relatin? Accurate Statements When g equals zer percent then the stck's intrinsic value cmputes as the present value f a perpetuity, div/r. When g exceeds r then the stck's intrinsic value tends t infinity, meaning the stck is priceless. The stck's intrinsic value is a decreasing functin f the discunt rate r.

16 12.1. ST1e Yesterday the Cmpany paid its annual dividend f $2.60 per share, its payut rati always is 30% (= dividends t / net incme t), and tday yu wish t purchase the stck while its price-t-earnings rati (= shareprice t / earnings per share t) is Yu believe that the dividend grwth rate is 4.3%. Yu believe that a fair ttal rate f return fr this stck is 9.8%. If als yu believe the stck is valued accrding t the dividend grwth mdel, which statement is mst cnsistent with yur beliefs? a. Intrinsic value is $56.70 and the share is undervalued b. Intrinsic value is $42.87 and the share is vervalued c. Intrinsic value is $49.31 and the share is undervalued d. Intrinsic value is $49.31 and the share is vervalued e. Intrinsic value is $56.70 and the share is vervalued ST2a The Cmpany is expected t annunce their annual dividend tmrrw. One year ag they paid a dividend f $2.90, and 5 years ag they paid $2.15. Yu believe that future dividends will grw by the same rate as past nes. Yu are aware that riskless gvernment securities are yielding 4.8%, and yu make an ffer t purchase the stck s that yu earn 9.8% abve the riskless rate. Hw much is yur ffer price? First, calculate the dividend grwth rate. N = 5 1 = 4 I/Y = CPT = PV = 2.15 PMT = 0 FV = 2.90 Secnd, calculate the intrinsic value t figure ut yur ffer price.

17 12.3. ST16 A share f cmpany stck just paid its annual dividend f $2.70. Exactly 6 years ag the dividend was $2.04. Yur analyst tells yu the stck's expected dividend yield is 2.7%. Yu believe the cnstant grwth dividend valuatin mdel applies perfectly t this prperly valued stck. Find (i) the expected ttal rate f return and (ii) the stck's current intrinsic value. First, calculate the dividend grwth rate. N = 6 I/Y = CPT = PV = 2.04 PMT = 0 FV = 2.70 Next, calculate the stcks ttal rate f return,. Finally, calculate intrinsic value ST17 Yu pick up the Wall Street Jurnal and see that riskless gvernment securities are ffering 5.1%. Yu read that the Cmpany just increased their annual dividend by $0.68 cents s that tday it is paying a $7.55 dividend per share. Yu als read that its share price is $ Yu believe the cnstant grwth dividend valuatin mdel applies perfectly t this prperly valued stck. What is the implied risk premium that is earned frm wning the stck; that is, by hw much des the expected return n the stck exceed the riskless interest rate? First find the dividend grwth rate,. Then, find the stcks return,. Finally find the risk premium.

18 13. ST13 Yesterday (year-end 2525) the cmpany paid its annual dividend f $1.85. Yu believe that the stck merits a buy recmmendatin if it returns 8.5% per year. Yur estimate f intrinsic value assumes that dividends grw smthly in accrdance with the cnstant expnential grwth mdel. The annual dividend histry is: year, dividend 2521, $ , $ , $ , $1.56 Find the best estimate f the dividend grwth rate and intrinsic value. First, use the DATA functin n yur calculatr t enter the infrmatin frm the last five years X01 = 1 Y01 = 1.62 X02 = 2 Y02 = 1.47 X03 = 3 Y03 = 1.57 X04 = 4 Y04 = 1.56 X05 = 5 Y05 = 1.85 Next, Use the STAT functin t find the dividend grwth rate, by lking up in the calculatr. (Make sure the STAT functin is set t EXP) Then, use the STAT functin t find what the next dividend will be. X = 6 Y = CPT = 1.77 Finally, use the next dividend and t find the intrinsic value.

19 14. SV3a The Cmpany just annunced earnings per share f $3.80, which means that their price t earnings rati is The Cmpany has an asset turnver rati (= Sales t / Ttal assets t) f 2.21, a net prfit margin (= net incme / sales) f 5.6%, a debt rati (= ttal debt / ttal assets) f 35%, and a payut rati (= dividends / net incme) f 30%. The Cmpany always perates at their sustainable grwth rate and successfully hlds cnstant all relevant financial ratis. Yu wuld like t invest in the stck such that yu'll get a 23.1% ttal rate f return. What is yur assessment f the stck's intrinsic value? First, calculate the sustainable grwth rate. Next, calculate the intrinsic value. ( )

20 15.1. ER5 Yur analysis f cmmn stcks fr cmpanies X and Y lead yu t believe rates f return depend as fllws n the future strength f the ecnmy: --- The prbability fr declining GNP is 40% in which case ROR x = -0.3% and ROR Y = -5.4%. --- The prbability fr flat GNP is 30% in which case ROR x = 10.4% and ROR Y = 23.1%. --- The prbability fr rising GNP is 30% in which case ROR x = 14.2% and ROR Y = 15.4%. Which statement is mst accurate? a. The standard deviatin is 6.35% fr X, 12.44% fr Y, and X is dminant. b. The standard deviatin is 6.35% fr X, 12.44% fr Y, and there is a trade-ff. c. The standard deviatin is 6.35% fr X, 12.44% fr Y, and Y is dminant. d. The standard deviatin is 6.35% fr X, 10.37% fr Y, and X is dminant. e. The standard deviatin is 6.35% fr X, 10.37% fr Y, and Y is dminant. [ ] ( ( [ ]) ) ( ) [ ] ( ( [ ]) ) ( ) Since X has a smaller standard deviatin and Y has a larger expected return there is a tradeff and the crrect answer is b ER16 Yur analysis f a small cmpany cnvinces yu that future mvements in their stck price depend n hw many big clients adpt the small cmpany's prduct innvatins. Tday's price fr this nndividend-paying small cmpany stck is $13. Yur beliefs abut future utcmes include: --- The prbability is 25% that ne big client adpts the prduct in which case the resultant intrinsic value fr the cmpany stck price likely will be $ The prbability is 10% that tw big clients adpt the prduct in which case the resultant intrinsic value fr the cmpany stck price likely will be $37. If n big clients adpt the prduct then the small cmpany ges bankrupt and the stck is wrthless. Cmpute this small cmpany stck's measurements fr risk [= sigma] and return [= E(ROR)]. [ ] ( ( [ ]) ) ( ( ) )

21 16.1. BS22 Chse the mst accurate statement abut the NASDAQ stck exchange. Accurate Statements The NASD (Natinal Assciatin f Securities Dealers) created NASDAQ and every securities dealer in the USA that wrks with the public must belng t NASD NASDAQ is a cmplex telecmmunicatins netwrk cmpsed f many market makers n many stcks NASDAQ lists stcks fr between 3,000 and 5,500 cmpanies BS26 Which statement abut the NASDAQ market is mst accurate? Accurate Statements NASDAQ is a market cmprised f many market makers fr between 3,000 and 5,500 stcks All brkers and cmpanies in the U.S.A. wrking with securities and the public are members f NASD NASDAQ is a market that lacks a physical exchange flr but has a cmplex telecmmunicatins netwrk BS36 The acquisitin f equities in the U.S. financial markets ccurs in a very cmpetitive marketplace with many layers and alternative rutes fr trade executin. Which ne f the fllwing chices is a blatantly FALSE descriptin abut ne f the rutes. Accurate Statements (Nte that the questin asks fr FALSE statements, s these statements are all incrrect answers) The Philadelphia Stck Exchange (PHLX) was funded in 1790 and is the natin's ldest. The PHLX has a strng market psitin trading 1,600 equity ptins, 19 sectrs index ptins, and currency ptins and futures. The Pink sheets were funded in 1904 in New Yrk and tday qute stck prices fr cmpanies that d nt register with the SEC and are nt required t file financial statements with the gvernment. The Natinal Stck Exchange (NSX) in Chicag is the third largest stck market in the U.S.A. NSX was funded in 1885 as the Cincinnati Stck Exchange. The Pacific Stck Exchange (PCX) in San Francisc was funded in 1862 and in 1999 PCX became the first U.S. stck exchange t demutualize, meaning switch frm a member-wned rganizatin and instead perate as a fr-prfit publicly traded cmpany. In 2002 PCX clsed its equities flrs and migrated stck trading t the Archipelag Exchange (ArcaEx). The OTC Bulletin Bard (OTCBB) began peratins in June 1990 t prvide transparency in the ver-the-cunter equities market. The OTCBB prvides price qutes fr stcks fr cmpanies that register and file financial statements with the SEC. Average share price fr OTCBB stcks is abut ten cents a share.

22 17. ER2c Yur analysis f utcmes fr sales and the assciated rate f return n cmmn stcks fr cmpanies X and Y are shwn belw. Yu intend t frm a prtfli by allcating 45% f yur funds in Cmpany X, and the remainder in Cmpany Y. --- The prbability fr declining Sales is 30% in which case ROR x = -2.7% and ROR Y = 4.1%. --- The prbability fr flat Sales is 35% in which case ROR x = 9.5% and ROR Y = 20.1%. --- The prbability fr rising Sales is 35% in which case ROR x = 19.1% and ROR Y = -9.6%. What is the expected return and standard deviatin f prtfli returns? [ ] ( ( [ ]) ) ( )

23 18. ER12 The rates f return listed belw fr securities X and Y are equally likely. Find the standard deviatin and expected rates f return fr securities X and Y, and als cmpare the tw regarding dminance r tradeff. ROR fr X: -1.1%, 9.5%, 19.5%, 15.9% ROR fr Y: 23.5%, 16.5%, 13.7%, -4.3% [ ] ( ( [ ]) ) ( ) [ ] ( ( [ ]) ) ( ) X has a lwer expected return, but it als has less risk, therefre X and Y exist as a tradeff.

24 19. ER9c Yu frm a prtfli that invests 60% f ttal funds in stck X and 40% in stck Z. Tw pssible utcmes exist. The prbability is 45% that the first utcme ccurs, in which case the rates f return equal 15% fr X and 29% fr Z. The prbability is 55% that the secnd utcme ccurs, in which case the rates f return equal 35% fr X and 12% fr Z. Find the diversificatin benefit, measured as the standard deviatin reductin in basis pints (BP), that the prtfli prvides. [ ] ( ( [ ]) ) ( ) [ ] ( ( [ ]) ) ( ) [ ] ( ( [ ]) ) ( ( ) (( ) ) )

25 20.1. ER3 The expected rate f return n cmmn stck fr cmpany X equals 7.6%. Fr Cmpany Y, the expected rate f return is 12.9%. Yu wish t frm a prtfli by allcating sme f yur funds in Cmpany X and the remainder in Cmpany Y. In rder t frm a prtfli whse expected return equals 9.50%, what prprtin f funds shuld be invested in Cmpany X? [ ] [ ] ER7 The standard deviatin f returns equals 10.0% fr stck X and 14.0% fr stck Z. The crrelatin between the tw stcks equals Yu make a prtfli that allcates 70% f funds t stck X. The remainder is put in stck Z. Which statement crrectly describes the risk f the resultant prtfli? a. The prtfli standard deviatin is 7.1% and represents diversificatin benefits f 304 basis pints relative t average cmpnent risk b. The prtfli standard deviatin is 8.2% and represents diversificatin benefits f 349 basis pints relative t average cmpnent risk c. The prtfli standard deviatin is 8.2% and represents diversificatin benefits f 304 basis pints relative t average cmpnent risk d. The prtfli standard deviatin is 7.1% and represents diversificatin benefits f 349 basis pints relative t average cmpnent risk e. The prtfli standard deviatin is 6.2% and represents diversificatin benefits f 304 basis pints relative t average cmpnent risk ( ) ( ) Answer = C

26 20.3. ER8b Investment risk, as measured by the standard deviatin f returns, equals 17.8% fr stck X and 24.3% fr stck Y. The crrelatin between the securities is zer. Yu frm a prtfli allcated 55% in X and 45% in Y. Find the diversificatin benefit, measured as percent reductin in risk, fr the prtfli. ( ) ( ) ER13 At the beginning f last mnth abut 30% f yur $5,000 prtfli was in stck X; stck Y accunted fr 30% and stck Z fr the rest. Mnthly rates f return equaled 16% fr stck X, 15% fr Y, and 12% fr Z. Find last mnth's percentage change in ttal prtfli wealth.

27 21. MR4a The standard deviatin f expected returns fr investments X and Y equal 12.5% and 18.0%, respectively. The crrelatin between returns fr X and Y is Hw much risk reductin, that is diversificatin benefit in basis pints, des the minimum risk prtfli prvide? ( ) ( )

28 22.1. ER10 Suppse that yu are able t perfectly measure expected return. Als, suppse that there exist tw different kinds f risk that yu can measure, call them Risk 1 and Risk 2. The amunt f Risk 1 an investment pssesses is ttally unrelated t the amunt f Risk 2 that it pssesses. Three pssible asset investments, call them X, Y, and Z, have measurements fr (Risk 1, Risk 2, return) as fllws: X: (25,10,30); Y: (20,15,24); Z: (20,30,34). Cmpare the three with regards t dminance r tradeff. a. X and Y cexist as tradeffs b. Z dminates Y c. X dminates Z d. Tw chices, A and C, are crrect e. The three A-B-C chices are all crrect Answer = A ER11 Suppse that yu are able t perfectly measure risk and expected return, and the bigger the number the bigger the risk r return. Measurements f (risk, return) fr three pssible asset investments, call them X, Y, and Z, are as fllws: X: (10,10); Y: (10,24); Z: (25,27). Cmpare the three with regards t dminance r tradeff. a. X and Y cexist as tradeffs b. Y and Z cexist as tradeffs c. X dminates Z d. Tw chices, A and B, are crrect e. Nne f the A-B-C chices are crrect Answer = B TR19 The mst cmmn statistic fr measuring risk is the standard deviatin f expected returns. Which statement best describes the standard deviatin as a risk measure? Accurate Statements the standard deviatin gets larger as the likelihd f extreme utcmes increases the standard deviatin is equally sensitive t upside as well as dwnside extreme returns when expected returns have a nrmal distributin then the 95% cnfidence interval fr next perid's return apprximately equals the mean return plus r minus tw standard deviatins

29 22.4. TR28 The minimum risk prtfli fr tw securities, call them X and Y, is easily fund given the cmpnent security risks (say sigma(x) and sigma(y) ) and the crrelatin between returns (rh). Which statement accurately describes the minimum risk prtfli? Accurate Statements The allcatin in X increases as the risk f Y increases. The cvariance equals the prduct f rh times sigma(x) times sigma(y) and always the signs f cvariance and rh are identical. When the crrelatin equals zer then the allcatin t X equals the rati f Y's variance t the sum f variances.

30 23. MR1d Find the cmbinatin f Alpha and Zed that yield the minimum risk prtfli given that each f the paired-utcmes is equally likely: Outcme 1: ROR Alpha = -0.9% and ROR Zed = 17.3%. Outcme 2: ROR Alpha = 6.9% and ROR Zed = 9.2%. Outcme 3: ROR Alpha = 23.7% and ROR Zed = 18.0%. Outcme 4: ROR Alpha = 16.9% and ROR Zed = -6.0%. Which statement abut the minimum risk prtfli is mst accurate? a. the expected return is 10.7% and the standard deviatin is 5.2% b. the expected return is 12.3% and the standard deviatin is 5.2% c. the expected return is 14.1% and the standard deviatin is 6.0% d. the expected return is 14.1% and the standard deviatin is 5.2% e. the expected return is 10.7% and the standard deviatin is 6.0% [ ] ( ( [ ]) ) ( ) [ ] ( ( [ ]) ) ( ( ) ) ( [ ])( [ ]) ( ) [ ] [ ] ( ) ( )

31 24 MR3c The standard deviatin f expected returns fr investments X and Y equal 17.5% and 11.5%, respectively. The crrelatin between returns fr X and Y is Find the cmbinatin f X and Y that yield the minimum risk prtfli. If yur bjective is t frm a prtfli with these tw securities that is nt dminated by any ther cmbinatin, which ne statement is supprted best by yur finding? a. If the expected return is greater fr Y than fr X, then dminant prtflis cmprise exclusively psitins that allcate between 35.5% and 100% in X b. If the expected return is greater fr Y than fr X, then dminant prtflis cmprise exclusively psitins that allcate between 35.5% and 100% in Y c. If the expected return is greater fr Y than fr X, then dminant prtflis cmprise exclusively psitins that allcate between 35.5% and 0% in Y d. If the expected return is less fr Y than fr X, then dminant prtflis cmprise exclusively psitins that allcate between 64.5% and 100% in Y e. If the expected return is less fr X than fr Y, then dminant prtflis cmprise exclusively psitins that allcate between 64.5% and 100% in Y The dminant prtfli is the cmbinatin that gives yu a higher return fr adding risk. Since the lwest risk happens when 35.5% f the prtfli is invested in stck X then the dminant prtfli is between that allcatin and 100% in whichever stck has the highest return. Answer = E

32 25.1. MR2a Thrughut the past, the return fr Large Cap Stcks has averaged 11.8% and the standard deviatin has been 34.7%. Fr Grwth Stcks, the return has averaged 15.1% and the standard deviatin 27.8%. The crrelatin between the returns fr these tw assets has been What is the percentage allcatin f funds in Large Cap Stcks that results in a prtfli with the lwest pssible risk; the remaining funds are t be invested in the ther asset MR5 Thrughut the past, the return fr type X stcks has averaged 12.2% and the standard deviatin has been 31.0%. Fr type Y stcks the return has averaged 8.9% and the standard deviatin 24.0%. The crrelatin between the returns fr these tw assets has been Yu expect these tendencies t persist int the future. What is the mst cmprehensive allcatin rule that crrectly describes all prtflis in the feasible allcatin set? a. Always invest 74.7% r mre in asset Y b. Always invest 74.7% r less in asset X c. Always invest 25.3% r less in asset X d. Always invest 31.7% r mre in asset X e. Always invest 25.3% r mre in asset Y Since X has a higher return the answer is D.

33 25.3. MR6 Thrughut the past, the standard deviatin fr type X stcks has averaged 10.5%. Fr type Y stcks the standard deviatin has averaged 11.5%. These tw asset return series als always seem t be in uncrrelated parts f the business cycle - the crrelatin cefficient fr returns is indistinguishable frm zer. Yu expect these tendencies t persist int the future. Yu als expect that Y is s different frm X that X crrelates mre psitively with almst every ther stck. What is the mst likely statement that crrectly cmpares the minimum risk prtfli cntaining X and Y with the prtfli cntaining X and any ther stck? a. Allcating 72.1% f a prtfli t type X stcks and the rest in almst any ther stck besides Y will result in a prtfli with greater diversificatin benefits. b. Allcating 62.7% f a prtfli t type X stcks and the rest in almst any ther stck besides Y will result in a prtfli with greater diversificatin benefits. c. Allcating 54.5% f a prtfli t type X stcks and the rest in almst any ther stck besides Y will result in a prtfli with greater diversificatin benefits. d. Allcating 54.5% f a prtfli t type X stcks and the rest in almst any ther stck besides Y will result in a prtfli with fewer diversificatin benefits. e. Allcating 62.7% f a prtfli t type X stcks and the rest in almst any ther stck besides Y will result in a prtfli with fewer diversificatin benefits. Answer = D MR7 Thrughut the past, the return fr type X stcks has averaged 11.2% and the standard deviatin has been 26.6%. Fr type Y stcks the return has averaged 8.1% and the standard deviatin 35.9%. The crrelatin between the returns fr these tw assets has been Yu expect these tendencies t persist int the future. Fr the minimum risk prtfli cmprising X and Y what is the allcatin and average prtfli risk? a. The minimum risk prtfli allcates 65.0% t X; average cmpnent risk is 34.3%. b. The minimum risk prtfli allcates 65.0% t X; average cmpnent risk is 29.9%. c. The minimum risk prtfli allcates 65.0% t X; average cmpnent risk is 39.5%. d. The minimum risk prtfli allcates 74.8% t X; average cmpnent risk is 34.3%. e. The minimum risk prtfli allcates 74.8% t X; average cmpnent risk is 29.9%. Answer = B