Reference no: EM132136176

Question 1:

The stock of Business Adventures sells for $40 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows:

	Dividend	Stock Price
Boom	$2.00	$50
Normal economy	1.00	43
Recession	0.50	34

a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely.

b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 4%.For Problems 12-16, assume that you manage a risky portfolio with an expected rate of return 0 and a standard deviation of 27%. The T-bill rate is 7%.

Question 2:

Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. (LO 5-3)

a. What is the expected return and standard deviation of your client's portfolio?

b. Suppose your rislcy portfolio includes the following investments in the given proportions:

Stock A	27%
Stock B	33%
Stock C	40%

What are the investment proportions of your client's overall pordolio, including the position in T-bills?

c. What is the Sharpe ratio (8) of your risky portfolio and your client's overall portfolio?

d. Draw the CAL of your portfolio on an expected return/standard deviation diagram. What is the slone of the CAL? Show the position of your client on your fund's CAL.