Homework in excel with formulas 12pm.
NicholasHawkins
fin550_homework_week_4.xlsxChapter8Q3
| 3. You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets: | ||
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| a. For each portfolio, calculate the risk premium per unit of risk that you expect to receive ([E(R) − RFR]/σ). Assume that the risk-free rate is 3.0 percent. | ||
| b. Using your computations in Part a, explain which of these five portfolios is most likely to be the market portfolio. Use your calculations to draw the capital market line (CML). | ||
| c. If you are only willing to make an investment with σ = 7.0%, is it possible for you to earn a return of 7.0 percent? | ||
| d. What is the minimum level of risk that would be necessary for an investment to earn 7.0 percent? What is the composition of the portfolio along the CML that will generate that expected return? | ||
| e. Suppose you are now willing to make an investment with σ = 18.2%. What would be the investment proportions in the riskless asset and the market portfolio for this portfolio? What is the expected return for this portfolio? | ||
| Portifolio | Exepected return | Standard Deviation |
| Q | 7.80% | 10.50% |
| R | 10 | 14 |
| S | 4.6 | 5 |
| T | 11.7 | 18.5 |
| U | 6.2 | 7.5 |
Chapter8Q8
| 8 | ||
| As an equity analyst, you have developed the following return forecasts and risk estimates for two different stock mutual funds (Fund T and Fund U): | ||
| a. | ||
| If the risk-free rate is 3.9 percent and the expected market risk premium (i.e., E(RM) ? RFR) is 6.1 percent, calculate the expected return for each mutual fund according to the CAPM. | ||
| b. | ||
| Using the estimated expected returns from Part a along with your own return forecasts, demonstrate whether Fund T and Fund U are currently priced to fall directly on the security market line (SML), above the SML, or below the SML. | ||
| c. | ||
| According to your analysis, are Funds T and U overvalued, undervalued, or properly valued? | ||
| Forcasted Return | CAPM Beta | |
| Fund T | 9.00% | 1.2 |
| Fund U | 10 | 0.8 |
Chapter8Q10
| Draw the security market line for each of the following conditions: | |||
| a. (1) RFR = 0.08; RM(proxy) = 0.12 | |||
| (2) Rz = 0.06; RM(true) = 0.15 | |||
| b. Rader Tire has the following results for the last six periods. Calculate and compare the betas using each index. | |||
| Rates of Return | |||
| Redar Tire | Proxy Specific Index | True General Index | |
| Period | % | % | % |
| 1 | 29 | 12 | 15 |
| 2 | 12 | 10 | 13 |
| 3 | -12 | -9 | -8 |
| 4 | 17 | 14 | 18 |
| 5 | 20 | 25 | 28 |
| 6 | -5 | -10 | 0 |
| c. If the current period return for the market is 12 percent and for Rader Tire it is 11 percent, are superior results being obtained for either index beta? |
Chapter9Q3
| You have been assigned the task of estimating the expected returns for three different stocks: QRS, TUV, and WXY. Your preliminary analysis has established the historical risk premiums associated with three risk factors that could potentially be included in your calculations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2). These values are: ?MKT = 7.5%, ?MACRO1 = ?0.3%, and ?MACRO2 = 0.6%. You have also estimated the following factor betas (i.e., loadings) for all three stocks with respect to each of these potential risk factors: | |||
| Calculate expected returns for the three stocks using just the MKT risk factor. Assume a risk-free rate of 4.5%. | |||
| b. | |||
| Calculate the expected returns for the three stocks using all three risk factors and the same 4.5% risk-free rate. | |||
| c. | |||
| Discuss the differences between the expected return estimates from the single-factor model and those from the multifactor model. Which estimates are most likely to be more useful in practice? | |||
| d. | |||
| What sort of exposure might MACRO2 represent? Given the estimated factor betas, is it really reasonable to consider it a common (i.e., systematic) risk factor? | |||
| Stock | MKT | Macro 1 | Marco 2 |
| QRS | 1.24 | -0.42 | 0 |
| TUV | 0.91 | 0.54 | 0.23 |
| WXY | 1.03 | -0.09 | 0 |
Chapter9Q5
| Suppose that three stocks (A, B, and C) and two common risk factors (1 and 2) have the following relationship: |
| a. If λ1 = 4% and λ2 = 2%, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for $30 and will not pay a dividend in the next year. |
| b. Suppose that you know that next year the prices for Stocks A, B, and C will actually be $31.50, $35.00, and $30.50. Create and demonstrate a riskless, arbitrage investment to take advantage of these mispriced securities. What is the profit from your investment? You may assume |
| that you can use the proceeds from any necessary short sale. |
Sheet6
| 7. a. Using regression analysis, calculate the factor betas of each stock associated with each of the common risk factors. Which of these coefficients are statistically significant? |
| b. How well does the factor model explain the variation in portfolio returns? On what basis can you make an evaluation of this nature? |
| c. Suppose you are now told that the three factors in Exhibit 9.12 represent the risk exposures in the Fama-French characteristic-based model (i.e., excess market, SMB, and HML). Based on your regression results, which one of these factors is the most likely to be the market factor? Explain why. |
| d. Suppose it is further revealed that Factor 3 is the HML factor. Which of the two portfolios is most likely to be a growth-oriented fund and which is a value-oriented fund? Explain why. |
