FINANCIAL MANAGEMENT

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E(Rp) = (0,30 x 0,35) + (0,50 x 0,1380) + (0,20 x(-0,2020))= 0,1336 =13,36%

Variance is:

p= 0,30 + 0,5 + 0,20 = 0,036584[pic 13][pic 14][pic 15][pic 16]

Standard deviation of the portfolio is:

p= = 0,191269 = 19,13%[pic 17][pic 18]

- Expected risk premium on the portfolio: 13,36% - 3,80% = 9,56%

Problem IV

For this problem, we used Microsoft Excel to compute the formulas as a lot of data. Here are the screenshots justifying our answers:

[pic 19]

[pic 20][pic 21]

We proceeded as follows to answer questions a), b) and c) :

- In H60 we have put “=(C60-C61)/C61”

- In H63 we have put “=AVERAGE(H2:H60)”

- In H64 we have put “=VAR(H2:H60)”

- In H65 we have put “=STDEVA(H2:H60)”

- In H66 we have put “=COVARIANCE(H2:H60;N2:N60)”

- In H67 we have put “=H66/$N$64”

- In H68 we have put “=0,01+H67*($N$63-0,01)”

➔ Then we dragged the formulas to find the values for the others stocks and the market.

d) The total risk depends on Beta value this is the reason why we can say that Apple is the riskiest one as its beta of 1.57 is the highest and that J.C. Penney Company is the least risky as its beta of 0.57 is the lowest.

e) A company exposure to the market depends on volatility value, that’s why we can say that Apple has the largest exposure to market risk as its volatility is the most important and that IBM has the narrowest exposure to market risk as its volatility is the less important.

f) To know the expected return of Uncle Charlie’s portfolio we have to compute this formula :

E(Rp) = w1R1 + w2R2 + ...+ wnRn

Thus we obtain:

E(Rp) = 0.25*E(R Microsoft) + 0.20*E(R Apple) + 0.20*E(R Ibm) + 0.30*E(R Disney) + 0.05*E(R Jcp)

E(Rp) = 0,94442 %

Problem V

A)

MVC = $[pic 22]

$[pic 23]

$[pic 24]

Now we have to find V:

$[pic 25]

And then:

[pic 26]

[pic 27]

[pic 28]

B)

First we need to calculate what the returns are:

[pic 29]

[pic 30]

[pic 31]

1140 = + [pic 32][pic 33]

N= 30; PMT = 37,50; FV = 1000; PV = -1140; CPT I/Y = 3,03%; YTM = 3,03 (2) = 6,07%

[pic 34]

Effective cost of Debt:

6.07% x (1-35%) = 3.95%

[pic 35]

C)

[pic 36]