Read the instructions carefully and complete all work in detail.

Week 3 Individual Assignment- Refer to Chapters 6 and 7 for materials to help you complete this assignment. Show step by step instructions on how you get to the answers in detail. The answers are provided to you for each question. You have to write in words and numbers step by step instructions on how exactly you get to the final answer which is highlighted for you.

3.1. Paris Company has made a portfolio of these three securities: 

Security	Cost	E(R)	σ(R)
Treasury bond	$65,000	5%	0
Marseille Corporation	$60,000	13%	25%
Lyon Company	$35,000	17%	35%

 The correlation coefficient between Marseille and Lyon is 0.6. If the returns are normally distributed, find the probability that the return of the portfolio is more than 8%.    56.83% ♥ 

3.2. Suppose you have $50,000 that you want to invest in two companies in the following table. Their correlation coefficient is 40%. Your portfolio should have a return of 13%. 

Security	Price/share	E(R)	σ(R)
Toulouse Oil Company	$10	12%	25%
Nice Aluminum	$20	16%	32%

 (A) Approximately how many shares of stock of each company should you buy?    Toulouse 3750 shares, Nice 625 shares ♥

(B) What is the σ of the portfolio?    .2314 ♥

3.3. Nantes Corporation’s common stock sells for $51.25 a share and its current annual dividend is $5. The β of this stock is 1.3. 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 $1.25. Assume that the stock will maintain the growth in dividends. 

(A) Find the new β of the stock.   1.336 ♥

(B) Expected return of the market.    10.96% ♥

3.4. The Strasbourg Corp common stock has a β of 1.55 and it will pay a dividend of $1.65 next year. The following table shows the various possible economic situations. 

State of the economy	Probability	Expected return of the market
Good	50%	15%
Fair	30%	10%
Poor	20%	-10%

 The current riskless rate is 5%. The expected rate of growth of Strasbourg is 4%. Find the value of its common stock.    The answer is not available ♥

3.5. Montpellier Company stock currently sells at $150 a share. Given the uncertainty in the economy, you have estimated that after one year, the stock price and its dividend will have the following probability distribution. 

Probability	Price/share	Dividend/share
20%	$200	$5.00
30%	$160	$4.50
40%	$150	$4.00
10%	$130	$3.00

The expected return of the market is 12% and the risk-free rate is 5%. Estimate the β of the stock.    The answer is not available ♥

3.6. Bordeaux Company has the same growth rate as Rennes Corp. The current stock price of Bordeaux is $60 a share, and its dividend this year is $2. The riskless rate is 3% and the expected return on the market is 12%. Rennes Corp stock is selling at $40 a share. Its dividend next year will be $2.50 a share and its β is 1.5. Find the β of Bordeaux stock.    β = 1.214 ♥

3.7. Lille Autos has β = 1.4. It is interested in buying Reims Tires which has β = 1.2. Lille believes that after the acquisition, its β will become 1.3. The expected after-tax earnings from Reims will be $14 million for the first year, but this figure is expected to increase by 3% per year in future. The expected return on the market is 12%, and the riskless rate is 5%. Find the amount that Lille should spend on this acquisition.    $126.126 million ♥

3.8. Calculate the β of Le Havre Corporation from the following data. 

Year	Price of Le Havre stock	Dividend per share	S&P 500 index	S&P 500 dividend	Riskless rate
	beginning	end		beginning	end
2010	$70	$80	$2.00	1000	1050	3.05%	1.00%
2011	80	95	$2.00	1050	1100	3.20%	1.50%
2012	95	110	$3.00	1100	1300	3.50%	3.50%
2013	110	110	$1.00	1300	1400	3.00%	4.00%

β = .391872 » .39 ♥