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Q1.

You invested $3,000 in a portfolio with an expected return of 10 per cent and $2,000 in a
portfolio with an expected return of 16 per cent. What is the expected return of the combined
portfolio? 12.4%
Q2. Expected returns: Jose is thinking about purchasing a soft drink machine and placing it in a
business office. He knows that there is a 12 percent probability that someone who walks by the
machine will make a purchase from the machine, and he knows that the profit on each soft drink
sold is $0.10. If Jose expects 1,279 people per day to pass by the machine and requires a
complete return of his investment in one year, then what is the maximum price that he should be
willing to pay for the soft drink machine? Assume 250 working days in a year and ignore tax and
the time value of money. What is Jose's expected profit from the soft drink machine? $ 3,837

E(Revenue) = 1,2790.12$0.10250 days = $3,837

Therefore, the most Jose should pay for the machine is $3,837.

Q3. Portfolios with more than one asset: Emmy is analysing a two-share portfolio that
consists of a utility share and a commodity share. She knows that the return on the utility has a
standard deviation of 40 percent, and the return on the commodity has a standard deviation of 30
percent. However, she does not know the exact covariance in the returns of the two shares. Emmy
would like to plot the variance of the portfolio for each of three casescovariance of 0.01, 0, and
0.01 in order to understand how the variance of such a portfolio is affected by the covariance
term. Calculate the variance of the portfolio if the covariance is 0.01, 0 and -0.01 respectively,
assuming an equal proportion of each share in Emmys portfolio.
12 = 0.01 Variance, Var(R2 asset port) =0.0675

Var(R2 asset port) = x1212 + x2222 + 2x1x212

2 2 2 2
Var(R2 asset port) = 0.5 0.4 + 0.5 0.3 + 20.50.50.01 = 0.0675

12 = 0.0 Variance, Var(R2 asset port) =0.0625

Var(R2 asset port) = x1212 + x2222 + 2x1x212

2 2 2 2
Var(R2 asset port) = 0.5 0.4 + 0.5 0.3 + 20.50.50.0 = 0.0625
12 = -0.01 Variance, Var(R2 asset port) =0.0575

Var(R2 asset port) = x1212 + x2222 + 2x1x212

2 2 2 2
Var(R2 asset port) = 0.5 0.4 + 0.5 0.3 + 20.50.5(-0.01) = 0.0575
Q4. The expected return on Kiwi Computers shares is 16.6 per cent. If the risk-free rate is 4 per
cent and the expected return on the market is 10 per cent, then what is Kiwi's beta? 2.10

Q5. In order to fund her retirement, Glenda requires a portfolio with an expected return
of 11.6 percent per year over the next 30 years. She has decided to invest in Shares 1, 2, and 3,
with 25 percent in Share 1, 50 percent in Share 2, and 25 percent in Share 3. If Shares 1 and 2
have expected returns of 9 percent and 10 percent per year, respectively, then what is the
minimum expected annual return for Share 3 that will enable Glenda to achieve her investment
requirement? E(R3) = 0.174
The formula for the expected return of a three-share portfolio is:

E(R3 asset port) = x1E(R1) + x2E(R2) + x3E(R3)

Therefore, we can solve as in the following:

0.116 = 0.25*0.09 + 0.5*0.1 + 0.25*E(R3)

0.174= E(R3)
Q6. David is going to purchase two shares to form the initial holdings in his portfolio. Iron shares
have an expected return of 20 percent, while Copper shares have an expected return
of 30 percent.
1. If David plans to invest 30 percent of his funds in Iron and the remainder in Copper, then what
will be the expected return from his portfolio?

E(Rport) =0.2700

E(Rport) = 0.30.2 + 0.70.3 = 0.2700


2. What would the expected return of David's portfolio be if he invested 70 percent of his funds in
Iron shares?

E(Rport) = 0.2300

E(Rport) = 0.70.2 + 0.30.3 = 0.2300


Q7. The expected return on KarolCo. shares is 16.5 per cent. If the risk-free rate is 5 per cent and
the beta of KarolCo is 2.3, then what is the risk premium on the market? 5.0%

Q8. The expected return on the market portfolio is 14 percent, and the return on the risk-free
security is 5 percent. What is the expected return on a portfolio with a beta equal to 2?

E(Ri) = 23.0% E(Ri) = Rrf + (E(RM) - Rrf) = 5 + 2(14 - 5) = 23.0%

Q9. The excess return you earn by moving from a relatively risk-free investment to a risky
investment is called the: Risk premium
risk premium. This is related to the definition of risk premium.

Q10. Eight months ago, you purchased 400 shares of Winston, Inc. stock at a price of $54.90 a
share. The company pays quarterly dividends of $.50 a share. Today, you sold all of your shares
for $49.30 a share. What is your total percentage return on this investment? -8.4%
Total percentage return = ($49.30 - $54.90 + $.50 + $.50) $54.90 = -8.4% (loss)

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