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Self Attempt Questions - Solutions

The portfolio has an expected return of 24.5% and standard deviation of 21.98%. As the percentage of Asset W in the portfolio increases from 0% to 100%, the expected return increases from 4% to 12% and the beta increases from 0 to 1.1. Higher allocations to Asset W increase both expected return and risk as measured by beta.

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Shermaine Wan
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164 views5 pages

Self Attempt Questions - Solutions

The portfolio has an expected return of 24.5% and standard deviation of 21.98%. As the percentage of Asset W in the portfolio increases from 0% to 100%, the expected return increases from 4% to 12% and the beta increases from 0 to 1.1. Higher allocations to Asset W increase both expected return and risk as measured by beta.

Uploaded by

Shermaine Wan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Tutorial 1

Additional Question for student self-attempt


1. Suppose you purchase 500 shares of stock at $48 per share with an initial cash
investment of $8,000. If your broker requires a 30 percent maintenance margin, at
what share price will you be subject to a margin call? If you want to keep your
position open despite the stock price plunge, what alternatives do you have?

Solution:

Total purchase = 500 shares × $48


= $24,000
Margin loan = $24,000 – 8,000
= $16,000
Margin call price
= $16,000 / [500 – (.30 × 500)]
= $45.71
To meet a margin call, you can deposit additional cash into your trading account,
liquidate shares until your margin requirement is met, or deposit additional
marketable securities against your account as collateral.
Tutorial 2

Additional Question for student self-attempt


1. You purchased 2,000 shares in the New Pacific Growth Fund on January 2, 2022,
at an offering price of $47.10 per share. The front-end load for this fund is 5 percent,
and the back-end load for redemptions within one year is 2 percent. The underlying
assets in this mutual fund appreciate (including reinvested dividends) by 8 percent
during 2022, and you sell back your shares at the end of the year. If the operating
expense ratio for the New Pacific Growth Fund is 1.95 percent, what is your total
return from this investment? What do you conclude about the impact of fees in
evaluating mutual fund performance?

Solution:

Initial NAV = $47.10(1 – .05) = $44.75


Final NAV = $44.75[1 + (.08 – .0195)] = $47.45 ($47.46 if initial NAV rounded)
Sale proceeds per share = $47.45(1 – .02) = $46.50 ($46.51 if initial NAV rounded)
Total return = ($46.50 – 47.10) / $47.10 = -1.27% (1.25% with initial NAV rounded)
You lost -1.27% even though the fund’s investments grew by 8%. The various fees
and loads sharply reduced your return.
Tutorial 3

Additional Question for student self-attempt


1. Calculate the expected return and standard deviation of a carefully constructed
three-stock portfolio? The portfolio's allocation comprises 30% invested in Stock A,
30% invested in Stock B, and 40% invested in Stock C. Stock A presents an
expected return of 15% with a standard deviation of 20%. Stock B boasts an
expected return of 20% and a standard deviation of 24%. Additionally, Stock C
exhibits an expected return of 35% alongside a standard deviation of 48%.
Furthermore, to navigate the intricacies of interdependence, the investor found that
the correlation between Stock A and Stock B is 0.2, between Stock A and Stock C is
0.4, and between Stock B and Stock C is -0.3.

Solution:

Expected Return:

E(Rp) = WA(RA) + WB(RB) + WC(RC)


E(Rp) = 0.3(0.15) + 0.3(0.2) + 0.4(0.35)
E(Rp) = 0.245 or 24.5%

Standard Deviation:

σp2= WA2(σA2) + WB2(σB2) + WC2(σc2) + 2(WA)(WB)(σA)(σB)(Corr.AB) + 2 (WA)(WC)(σA)(σC)


(Corr. AC) + 2 (WB)(WC)(σB)(σC)(Corr. BC)
σp2= 0.32(0.22) + 0.32(0.242) + 0.42(0.482) + 2(0.3)(0.3)(0.2)(0.24)(0.2) + 2 (0.3)(0.4)
(0.2)(0.48)(0.4) + 2 (0.3)(0.4)(0.24)(0.48)(-0.3)
σp2= 0.0036 + 0.005184+ 0.036864 + 0.001728 + 0.009216 – 0.0082944
σp 2 = 0.0482976
σp = 0.2198 or 21.98%
Tutorial 5
Additional question
1. Asset W has an expected return of 12 percent and a beta of 1.1. If the risk-free rate is 4
percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate
the relationship between portfolio expected return and portfolio beta by plotting the expected
returns against the betas.
Percentage of Portfolio in Asset W Portfolio Expected Return Portfolio Beta
0%
25
50
75
100
125
150
Solution:
E(Rp) = WRF(RRF) + WP(RP)

E(rp) = WRF(4) + WW(12)


Applying the Weigtage of Risky Portfolio (Xw or WP) and risk-free weights (1- WP)

E(rp) = (1x4) + (0x12) = 4%


E(rp) = (0.75x4) + (0.25x12) = 6%
E(rp) = (0.50x4) + (0.50x12) = 8%
E(rp) = (0.25x4) + (0.75x12) = 10%
E(rp) = (0x4) + (1x12) = 12%
E(rp) = (-0.25x4) + (1.25x12) = 14%
E(rp) = (-0.50x4) + (1.5x12) = 16%
Beta of the Portfolio represent the weigtage average of individual beta.

P = (WRF x RF) + (WP x P)

P = (1x0) + (0x1.1) = 0.00


P = (0.75x0) + (0.25x1.1) = 0.28
P = (0.50x0) + (0.50x1.1) = 0.55
P = (0.25x0) + (0.75x1.1) = 0.83
P = (0x0) + (1x1.1) = 1.10
P = (-0.25x0) + (1.25x1.1) = 1.38
P = (-0.50x0) + (1.5x1.1) = 1.65

Solution:

xW E[rp] p xW E[rp] p
4.00% .00 12.00% 1.10
0% 100%
6.00% .28 14.00% 1.38
25 125
8.00% .55 16.00% 1.65
50 150
10.00% .83
75

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