1. Price in 2013 of stock X, Y and Z are $54, $32 and 45 respectively.

A financial
analyst of ABC Security Company forecasts the price of stock X,Y and Z after 1
year as following:
Period X Y Z
2014 52 30 40
2015 58 39 45
2016 55 32 47
2017 53 37 44
2018 64 39 49

a. What are expected return and standard deviation of the three stocks.
b. Should investor combine stock X and Y to form a portfolio
c. What are expected return and standard deviation of the risky portfolio P which
invests 60% in stock X and 40% in stock Y.
d. How much should investor invest in risky portfolio P in order to construct an
optimized complete portfolio, given risk-free rate is 6% and A = 3.
e. What are expected return and standard deviation of optimized complete
portfolio?
f. Which portfolio should be invested if investor is considering between portfolio 1
(20% in stock X and 80% in stock Y) and portfolio 2 (50% in stock X and 50% in
stock Z)
2. Current price of stock X and Y are $54 and $32 respectively. A financial analyst
of ABC Security Company forecasts the price of stock X and Y after 1 year as
following:
Economic
Probability Price of stock X Price of stock Y
conditions
Bad 0.2 42 27
OK 0.4 58 35
Good 0.4 65 40

a. What are expected return and standard deviation of the two stocks.
b. What are expected return and standard deviation of the risky portfolio P which
invests 60% in stock X and 40% in stock Y.
c. How much should investor invest in risky portfolio P in order to construct an
optimized complete portfolio, given risk-free rate is 6% and A = 3.
d. What are expected return and standard deviation of optimized complete
portfolio?
3. An investor is considering adding a risk-free asset with a return of 3% into his
risky portfolio. The expected return and standard deviation of the risky portfolio is
7% and 15%. His risk aversion value is 2
a) Calculate the optimal proportion invested in risk-free asset
b) Write an equation for the capital allocation line that will connect the risk-
free asset to the portfolio of risky assets
c) What is the standard deviation of the new portfolio that gives a 9% return
and is on the capital allocation line?

4. Stock A and B have expected return and standard deviation respectively as

follow
Stock Expected return Standard deviation
A 12% 14%
B 21% 18%
Correlation between A and B = 0.45
Risk-free rate = 4%

a) Which portfolio should be invested if investor is considering between Risky

portfolio 1 (30% in stock A and 70% in stock B) and portfolio 2 (25% in
stock A and 75% in stock B)
b) If Investor add a risk-free asset C with a return of 5% into the risky portfolio
that was choosed in part (a) to form a complete portfolio. What should the
optimal proportions of risky portfolio and risk-free asset for an investor
whose degree of risk aversion is 3.
c) Calculate the expected return and standard deviation of the complete
portfolio
5. An investor is holding the assets as follows:

+ risky portfolio :

- Bond A (ER= 11%; SD= 12%)

- Stock B (ER= 15%; SD= 17%)

+ The T-Bill is 7%, correlation of A and B= 0.8

a. What is ER and SD of optimal risky portfolio (include A and B)

 b. If the investor has A= 3.5. What the proportion of total investment should
be invested in risky portfolio and T-bill to construct the optimal complete
portfolio?

6. Price in 2013 of stock X and Y are $54 and $32 respectively. And the third is a
T-bill that yield a rate of 7%. A financial analyst of ABC Security Company
forecasts the price of stock X and Y after 1 year as following:

Period X Y

2014 52 30

2015 58 39

2016 55 32

2017 53 37

2018 64 39

a/ What are the investment proportion in the minimum-variance portfolio of the

two risky assets, and what is the expected return and standard deviation of the
portfolio?

b/ What are the investment proportion of (S) and (B) in the optimal risky
portfolio, and what is the expected return and standard deviation of the
portfolio?

c/ What is the Sharpe ratio of the best feasible CAL?

d/ You require that your complete portfolio yield an expected return of 16%, and
that it be efficient, on the best feasible CAL. What is the standard deviation of
your portfolio? What is the proportion invested in the T-bill fund and risky
portfolio?
7. Current price of stock X and Y are $54 and $32 respectively. A financial analyst
of ABC Security Company forecasts the price of stock X and Y after 1 year as
following:
Economic conditions Probability Price of stock X Price of stock Y

Bad 0.2 42 27

OK 0.4 58 35

Good 0.4 65 40

a. What are expected return and standard deviation of the two stocks.

b. What are expected return and standard deviation of the risky portfolio P which
invests 60% in A stock and 40% in B stock.

c. How much should investor invest in risky portfolio P in order to construct an

optimized complete portfolio, given risk-free rate is 5% and A = 2.

d. What are expected return and standard deviation of optimized complete

portfolio.

e. There is another alternative portfolio which has expected return 18% and
standard deviation 22%. Which portfolio should the investor invest in?

8.
An investor is considering an investment to discount-bond Z which has 4 years to
maturity, expected rate of return is 7%.
a/ Define bond price
b/ Define Macaulay duration
c/ Define MOD
d/ Define convexity
e/ Define new price of the bond if interest rate increases by 100bps, using
duration rule and duration with convexity rule.
f/ What is the percentage errors for (e)?

9. An investor has USD 10 million and plans to invest during 2.5 years period in
the following bond portfolio.
- Bond A: Discount bond with 3 years to maturity.
- Bond B: 6% coupon bond, 2 years to maturity.
Current market interest rate is 10%. Please advise the investor to construct an
appropriate bond portfolio.

10. Bond A has 5% coupon rate, maturity is 10 years, YTM=7%

a. Find HPR for a year investment period if YTM is 6% in the end of year.
b. If you sell bond after 1 year, tax on interest income is 40% and tax rate on
capital gain is 30%. The bond is subject to original issue discount tax treatment.
c. What is after tax holding period return on the bond?