UGBA103s06hw6_new_corrected

  

Bill Hung 17508938

Patrick Wang 16664628

ZhenZhen Qi 18347972

UGBA 103: Introduction to Finance 

Spring 2006

Instructor: Gregory La Blanc

Homework # 6

Due Thursday March 23

1. Suppose      that there are three types of people in the economy. Type As Bs and Cs. There      are also three assets x, y, and z. Assets x and y are risky but asset z is      risk free. Type As hold 45% of their portfolio in x, 30 % in y and 25% in      z. Type Bs hold 30% of their portfolio in x, 20% in y, and 50% in z. Type      Cs hold 15% in x, 10% in y, and 75% in z. Are these holdings consistent      with the Capital Asset Pricing Model being satisfied? Explain why or why      not. 

  2. Suppose      that the CAPM holds. The market portfolio has an expected return of 0.14      and a standard deviation of 0.35. The risk free rate is 0.05. How could      you construct a portfolio having a return of 0.20? What are the beta and      the standard deviation of this portfolio?

  

1. You      have discovered three portfolios with the following characteristics:

  

Investment

Expected Return

Beta

Unique Risk

 

A

6%

0

None

 

B

15%

1

None

 

C

18%

1.5

None

Plot expected returns against betas for these three portfolios. 

a. Do they all lie on the security market line and is there an arbitrage opportunity? They don’t lie on the same line. There is arbitrage opportunity. 

  

1. Use      EXCEL for this question. Will Eatem, a portfolio manager for the      Conservative Retirement Equity Fund (CREF), is considering investing in      the common stock of Big Caesar’s Pizza (stock symbol PIES). His analysts      have compiled the return data given below.

Calculate the Beta coefficient for PIES 

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1. Many      analysts subtract the riskless return from the market and security returns      and use those excess returns to calculate betas. Use this convention for      this problem. The following table provides the monthly returns for Exxon      Mobil common stock (XOM) and      the market as approximated by the S&P 500 index for a recent year.      Compute the following:

  

1. The       variance of the monthly return for each over these 12 months

Var(M) = E (r-ř)2.