Q1: Suppose Sarah starts her investment portfolio by allocating US$ 25,000 across three assets, stocks A, B and C, as follows:
Stock A: 40% of allocation
Stock B: 32% of allocation
A. At the end of the first year, Stock A returns 15.5%, Stock B returns 11% and Stock C returns 6.3%. Assuming zero trading costs, what is the total return on her portfolio?
B. At the start of year 2, Sarah re-trades across three stocks, allocating the same US$ 25,000 across the same securities, as follows: Stock A allocation of 35.7% of her invested amount, Stock B allocation of 51.0%. At the end of year 2, individual assets returns are -8.0% for Stock A, 9.5% for Stock B, and 14.6% for stock C. Assuming zero trading costs, what is the total return on her new portfolio for that year?
C. If Sarah did not trade at the start of year 2, what would have been her return to portfolio in year 2?
Show your work.
Q2:
A) At 10:45 a.m., Ashley placed a stop-loss order to sell 200 shares of Alpha stock at $43 a share. At 2:15 p.m., the price of Alpha fell to $42.90 and then rose to $43.40 a share by the end of the trading day. Ashley order was executed that day. Ashley would have received a price:
- of $42.90 a share for her stock since her order was already recorded in the designated market maker’s book.
- of $43.40 a share for her stock since that was the closing price on the day of execution.
- between $42.90 and $43.40 a share depending upon when her trade executed.
- equal to the average prices paid by the designated market maker during that trading day.
Explain your answers.
b) Angela placed a stop-limit order to sell 100 shares of RST stock at $28 when the market price of RST was $31. Shortly after Angela placed her order, trading on RST was halted due to a pending news announcement. When trading re-opens RST is priced at $24 a share. Within minutes the price of RST began to drop further until it reached $19 a share. Which of the following statements is (are) correct concerning Angela’s stop-limit order to sell? - Angela’s stock was sold for $28 a share.
- Angela’s stock was sold for $24 a share.
- Angela’s stock was sold at a price between $19 and $24 a share.
- Angela still owns her 100 shares of stock.
Explain your answers.
Q3: Returns on the stock of FBM and MMInc for the years 2017-2020 are shown below.
FBM MMInc
2017 -18.00% 26.00%
2018 32.00% -5.00%
2019 18.00% 3.00%
2020 1.00% 10.00%
a) Compute the average annual return for each stock and a portfolio consisting of 50% FBM and 50% MMInc.
b) Compute the standard deviation for each stock and the portfolio.
c) Are the stocks positively or negatively correlated and what is the effect on risk?
Explain your answers and show your work.
Q4:
A) The markets in general are paying a 1% real rate of return. Inflation is expected to be 3%. RJH stock commands an 8% risk premium. What is the expected rate of return on RJH stock? Explain your answer in terms of systematic and idiosyncratic risks, and the relationship between expected (required) market returns and inflation risk.
B) The required rate of return on the RJH common stock is 10%, holding all other assumptions as in (a), what is the risk premium associated with RJH stock? Explain your answer.
Q5: Which of the following will lower required rates of return and why?
a) higher rates of inflation
b) higher risk premiums
c) lower rates of inflation
d) lower dividend yields
e) higher demand for risky assets by investors
f) lower risk-free rate
Explain your answer(s).