EMSF
Ans 1:
Option A
Ans 2:
New Required return for HR = 7% + 2*(11% -7%) = 15%
New Required return for LR = 7% + .5*(11% - 7%) = 9%
So difference is 6%
Option E
Ans 3:
No of stocks = 20
Weight of each stock = 1/20
Beta of portfolio = 1.2
Beta of stock sold = 0.7
Beta of stock bought = 1.4
Hence new portfolio beta = 1.2 -.7/20 + 1.4/20 = 1.2 + .7/20 = 1.235
Option B
Ans 4:
New Beta = 0.7*1.5 = 1.05
Old required rate of return = 15%
So old risk free rate = 15% -5%*.7 =11.5%
New Required rate of return = 13.5% + 1.05*5% = 18.75%
Option C
Ans 5:
Security
Expected Return
Beta
Risk-free rate
Risk Premium
Required rate of return
Difference
A
9.01%
1.7
7%
2%
10.40%
-1.39%
B
7.06%
0
7%
2%
7.00%
0.06%
C
5.04%
-0.67
7%
2%
5.66%
-0.62%
D
8.74%
0.87
7%
2%
8.74%
0.00%
E
11.50%
2.5
7%
2%
12.00%
-0.50%
So best option is security b
Ans 6:
Required return for Bradley =7% + 1.3*(12%-7%) =13.5%
Required return for Douglas = 7% + .7*(12% -7%) =10.5%
So difference is 3%
Option A
Ans 7:
Using regression we have bX = 0.7358; bY = 1.3349. rX = 7% + 5%(0.7358) = 10.679%. rY = 7% + 5%(1.3349) = 13.6745%. rp = 14/20(10.679%) + 6/20(13.6745%) = 11.58%
Option C
Ans 8:
Current Beta = 1.4*1/7 + 1*2/7 + .8*4/7 =.94
New Beta = 1.4*25/70 + .8*45/70 = 1.04
Hence increase in returns = 5.5%*1.04 – 5.5%*.94 = .39%
Option C
Ans 9:
Old portfolio beta = (12%-5.5%)/6% =1.08
New Beta = 1.08 + .3*.7 -.3*1.6 =.81
So Required rate of return = 5.5% + .81*6% =10.38%
Option B
Ans 10:
Expected return = 11%
Portfolio beta = (11% -5%)/6% =1
Or, .2*0 + x*1 + (.8 –x)*1.5 =1
Or, .8*1.5 -1 = .5*x
Or, x = .2/.5 = 40%
Option B
Ans 11:
Target Return = 12%
Current Beta= .2*.6 + .3*.8 + .3*1.2 + .2*1.4 = 1
So Market risk premium = (10%-5%)/1 = 5%
New Beta = (12% -5%)/5% =1.4
So .2*x + .3*.8 + .3*1.2 + .2*1.4 = 1.4
X = 2.6
Option e
Ans 12:
Mean return of portfolio = .75*2.7% + .25*(-1.9%) = 1.55%
The correlation is
Option A
Ans 2:
New Required return for HR = 7% + 2*(11% -7%) = 15%
New Required return for LR = 7% + .5*(11% - 7%) = 9%
So difference is 6%
Option E
Ans 3:
No of stocks = 20
Weight of each stock = 1/20
Beta of portfolio = 1.2
Beta of stock sold = 0.7
Beta of stock bought = 1.4
Hence new portfolio beta = 1.2 -.7/20 + 1.4/20 = 1.2 + .7/20 = 1.235
Option B
Ans 4:
New Beta = 0.7*1.5 = 1.05
Old required rate of return = 15%
So old risk free rate = 15% -5%*.7 =11.5%
New Required rate of return = 13.5% + 1.05*5% = 18.75%
Option C
Ans 5:
Security
Expected Return
Beta
Risk-free rate
Risk Premium
Required rate of return
Difference
A
9.01%
1.7
7%
2%
10.40%
-1.39%
B
7.06%
0
7%
2%
7.00%
0.06%
C
5.04%
-0.67
7%
2%
5.66%
-0.62%
D
8.74%
0.87
7%
2%
8.74%
0.00%
E
11.50%
2.5
7%
2%
12.00%
-0.50%
So best option is security b
Ans 6:
Required return for Bradley =7% + 1.3*(12%-7%) =13.5%
Required return for Douglas = 7% + .7*(12% -7%) =10.5%
So difference is 3%
Option A
Ans 7:
Using regression we have bX = 0.7358; bY = 1.3349. rX = 7% + 5%(0.7358) = 10.679%. rY = 7% + 5%(1.3349) = 13.6745%. rp = 14/20(10.679%) + 6/20(13.6745%) = 11.58%
Option C
Ans 8:
Current Beta = 1.4*1/7 + 1*2/7 + .8*4/7 =.94
New Beta = 1.4*25/70 + .8*45/70 = 1.04
Hence increase in returns = 5.5%*1.04 – 5.5%*.94 = .39%
Option C
Ans 9:
Old portfolio beta = (12%-5.5%)/6% =1.08
New Beta = 1.08 + .3*.7 -.3*1.6 =.81
So Required rate of return = 5.5% + .81*6% =10.38%
Option B
Ans 10:
Expected return = 11%
Portfolio beta = (11% -5%)/6% =1
Or, .2*0 + x*1 + (.8 –x)*1.5 =1
Or, .8*1.5 -1 = .5*x
Or, x = .2/.5 = 40%
Option B
Ans 11:
Target Return = 12%
Current Beta= .2*.6 + .3*.8 + .3*1.2 + .2*1.4 = 1
So Market risk premium = (10%-5%)/1 = 5%
New Beta = (12% -5%)/5% =1.4
So .2*x + .3*.8 + .3*1.2 + .2*1.4 = 1.4
X = 2.6
Option e
Ans 12:
Mean return of portfolio = .75*2.7% + .25*(-1.9%) = 1.55%
The correlation is