Essay About Bi E And D That Form Portfolio P

If the Correlation Between E and D Equals 15%, What Are the Weights of E and D That Form Portfolio P?
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Show your work for all problems.Question 1If the correlation between E and D equals 15%, what are the weights of E and D that form portfolio P?E(R) = wEE + wDD11% = wE*13% + WD*8%11% = wE*13% +8% (1-WD)11% = 13%WE + 8% – 8% WE3% =5%WEWE = 60%WD =1 -60% = 40%WD = 40%   What is the standard deviation of portfolio P?      Correlation of Coefficient = Cov (E,D)/ σE σD                                                   15% = Cov./(12%*7%)                                                   Cov. = 15%*12%*7%                                                            = 0.126Portfolio Variance = w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cov(RA, RB)                                    = (0.6)2*12%^2) + (0.4)2*(7%)^2+ 2*(0.6)*(0.4)*(0.126)                                        = 6.6448                                    σ = 2.57775 If the CAPM holds, what must be the risk-­‐free rate, RF?Assume market rate = 7%E ( ri) =  rf  + Bi E(rm – rf)  11% = rf + 0.6667(7% -rf) 11% = rf +0.0467 – 0.6667rf1/3rf = 0.0633rf = 0.1899    = 19%Question 2.What is the expected return for the market portfolio, M?         E(R) = wED + wDE                    = 30%*0.03 +70%*0.30                   = 21.9If the risk-­‐free bond is paying 4%, what are the betas of stock X and Y?          E (ri) = rf + Bi E (rm – rf)                       0.09 = 4% +Bi (10%- 4%)                     0.05 = 6%Bi                  Bi (D) = 0.8         E (ri) = rf + Bi E (rm – rf)                    – 0.06 = 4% +Bi (10%- 4%)                  – 0.12 = 6%Bi                  Bi (E) = 2.0                         Question 3.What rate of return would be expected for a stock with beta = 0.25?          E (ri) = rf + Bi E (rm – rf)                     E (ri) = 4% +0.25 (11% – 4%)                              = 5.75                                     Currently priced at $55, you forecast the stock’s price to be $58.59 in two years. An annual dividend of $1 is expected at the end of each of the next two years. Given the stock’s beta, is it currently over-­‐ or under-­‐priced?         Use CAPM to determine the firm’s required return = 4% + 0.25 × (11% − 4%)                                                                                                           = 5.75           [pic 3]