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    HE3007 Financial Economics

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    LuisLo
    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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    HE3007 Financial Economics

    Uploaded by

    LuisLo
    32 views3 pages
    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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    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.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    32 views3 pages

    HE3007 Financial Economics

    Uploaded by

    LuisLo
    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.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    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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