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HE3007 Financial Economics

This document summarizes homework problems from Chapters 4, 5 and 6 of a financial economics textbook. [1] It includes problems on calculating rates of return on mutual funds versus CDs, analyzing portfolio manager performance, calculating stock returns and portfolio expected returns and standard deviations, and applying mean-variance analysis and the capital allocation line to determine optimal portfolios. [2] It asks the reader to calculate holding period returns, expected returns, standard deviations, and utility of different investments. [3] Questions involve selecting the best investment based on risk preferences and applying concepts like dominance to determine optimal portfolios.

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52 views

HE3007 Financial Economics

This document summarizes homework problems from Chapters 4, 5 and 6 of a financial economics textbook. [1] It includes problems on calculating rates of return on mutual funds versus CDs, analyzing portfolio manager performance, calculating stock returns and portfolio expected returns and standard deviations, and applying mean-variance analysis and the capital allocation line to determine optimal portfolios. [2] It asks the reader to calculate holding period returns, expected returns, standard deviations, and utility of different investments. [3] Questions involve selecting the best investment based on risk preferences and applying concepts like dominance to determine optimal portfolios.

Uploaded by

LuisLo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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HE3007 Financial Economics

HW 4

Chapter 4

1. You are considering an investment in a mutual fund with 5% front-end load


and an expense ratio of 1.05%. You can invest instead in a bank CD paying
7% interest. If you plan to invest for 2 years, what annual rate of return
(before any fees) must the fund portfolio earn for you to be better off in the
fund than in the CD?

2. Suppose you observe the investment performance of 350 portfolio managers


for five years and rank them by investment returns during each year. After
five years. You find that 11 of the funds have investment returns that place
the fund in the top half of the sample in each year of your sample. Such
consistency of performance indicates to you that these must be the funds
whose managers are in fact skilled, and you invest your money in these
funds. Is your conclusion warranted?
Chapter 5

1. You purchased a share of stock for $20. One year later you received $1 as a
dividend and sold the share for $29. What was your holding-period return? 
A. 45%
B. 50%
C. 5%
D. 40%
E. 32% 

2. You have been given this probability distribution for the holding-period return for
KMP and ABC stocks:

KMP ABC
State of the Economy Probability HPR HPR
Boom 30% 18% 0%
Normal growth 50% 12% 5%
Recession 20% -5% 10%

(1) What are the expected return/standard deviation for KMP and ABC stocks?

(2) Suppose you form a portfolio which is composed of 40% in KMP stock and 60%
in ABC stock. What are the expected return/standard deviation for the portfolio?
Chapter 6

1. According to the mean-variance criterion, which of the statements below is


correct?    
A. Investment B dominates Investment A.
B. Investment B dominates Investment C.
C. Investment D dominates all of the other investments.
D. Investment D dominates only Investment B.
E. Investment C dominates investment A.

    
U = E(r) - (A/2)s2

2. If you were risk-averse with A=4, which investment would you select? 
A. 1
B. 2
C. 3
D. 4
E. cannot tell from the information given

3. You manage an equity fund with an expected return of 16% and a standard
deviation of 20%. The rate of return on Treasury bills is 6%. Assume a client’s utility
function is as follows:

U =E ( r )−5 σ 2

(1) What is the slope of CAL?


(2) Please solve for the client’s optimal portfolio.

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