Week 4 Problem Set Chapter 11 - #6 Calculate the expected return on a portfolio of 45 percent Roll and 55 percent Ross by filling

in the table on p. 376. P59

Chapter 12 - #9 A share of stock sells for $53 today. The beta of the stock is 1.2, and the expected return on the market is 12%. The stock is expected to pay a dividend of $1.10 in one year. If the risk- free rate is 5.5%, what will the share price be in one year?
9. E(Ri) = .045 + (.11 .045)(1.2) = .1230 Dividend yield = $1.20/$48 = .0229 Capital gains yield = .1230 .0229 = .1001 Price next year = $48(1 + .1001) = $52.80

Chapter 13 - #22 Your portfolio allocates equal amounts to three stocks. All three stocks have the same mean annual return of 16%. Annual return standard deviations for these three stocks are 30%, 40%, and 50%. The return correlations among all three stocks are zero. What is the smallest expected loss for your portfolio in the coming year with a probability of 1%?

22. E(R) = .16 = [(.3332)(.402) + (.3332)(.502) + (.3332)(.602) + 2(.333)(.333)(.40)(.50)(0) + 2(.333)(.333)(.40)(.60)(0) + 2(.333)(.333)(.50)(.60)(0)]1/2 = .2925 Prob(R .16 2.326(.2925)) = 1% Prob(R .5205) = 1%

Week 5 Problem Set Chapter 14 - #20 Suppose you want to hedge a $400 million bond portfolio with a duration of 4.3 years using 10year Treasury note futures with a duration of 6.7 years, a futures price of 102, and 3 months to expiration. The multiplier on Treasury note futures is $100,000. How many contracts do you buy or sell?
20. DF = 8.5 + (3/12) = 8.75 years Contracts to sell = (5.1 $900,000,000) / (8.75 1.03 $100,000) = 5,092.93 or about 5,093 contracts. 21. DF = 8 + (85/365) = 8.23 years Contracts to sell = (11.2 $400,000,000) / (8.23 1.02 $100,000) = 5,334.90 or about 5,335 contracts.

Chapter 15 - #24 Suppose you buy one SPX call option with a strike of 1400 and write one SPX put option with a strike of 1400. What are the payoffs at maturity to this position for S& P 500 Index levels of 1300, 1350, 1400, 1450, and 1500?