Chapter 13

Problems 1-28
Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the "Analysis ToolPak" or "Solver Add-In" be installed in Excel. To install these, click on the Office button then "Excel Options," "Add-Ins" and select "Go." Check "Analyis ToolPak" and "Solver Add-In," then click "OK."

require that

Chapter 13
Question 1 Input area:

Shares of A Share price of A Shares of B Share price of B

$ $

180 45.00 140 27.00

Output area:

Portfolio value Weight of A Weight of B

$ 11,880 0.6818 0.3182

Chapter 13
Question 2 Input area:

Stock A value Stock B value Stock A E(R) Stock B E(R)

$ $

2,950 3,700 11.00% 15.00%

Output area:

Portfolio value Weight of A Weight of B Portfolio E(R)

6,650 0.4436 0.5564 13.23%

Chapter 13
Question 3 Input area:

Weight of X Weight of Y Weight of Z Stock X E(R) Stock Y E(R) Stock Z E(R)

60.00% 25.00% 15.00% 9.00% 17.00% 13.00%

Output area:

Portfolio E(R)

11.60%

Chapter 13
Question 4 Input area:

Portfolio value Stock X E(R) Stock Y E(R) Portfolio E(R)

10,000 14.00% 10.50% 12.40%

Output area:

Weight of Stock X Weight of Stock Y Dollar in Stock X Dollars in Stock Y $ $

0.5429 0.4571 5,428.57 4,571.43

Chapter 13
Question 5 Input area:

State Recession Boom

Probability 0.25 0.75

Return -0.08 0.21

Output area:

State Recession Boom Expected return

Probability 0.25 0.75

Return (0.08) 0.21

Product (0.0200) 0.1575 0.1375

Chapter 13
Question 6 Input area:

State Recession Normal Boom

Probability 0.20 0.50 0.30

Return (0.05) 0.12 0.25

Output area:

State Recession Nprmal Boom Expected return

Probability 0.20 0.50 0.30

Return (0.05) 0.12 0.25

Product (0.0100) 0.0600 0.0750 0.1250

Chapter 13
Question 7 Input area:

State Recession Normal Boom

Probability 0.15 0.65 0.20

Stock A 0.05 0.08 0.13

Stock B (0.17) 0.12 0.29

Output area:

Stock A Recession Normal Boom

Probability 0.15 0.65 0.20

Return 0.05 0.08 0.13 E(R) = 2.46%

Product 0.0075 0.0520 0.0260 8.55%

Standard Deviation =

Stock B Recession Normal Boom

Probability 0.15 0.65 0.20

Return (0.17) 0.12 0.29 E(R) = 13.53%

Product (0.0255) 0.0780 0.0580 11.05%

Standard Deviation =

Return Deviation (0.0355) (0.0055) 0.0445

Squared Deviation Product 0.00126 0.000189038 0.00003 1.96625E-05 0.00198 0.00039605 Variance = 0.00060

Return Deviation (0.2805) 0.0095 0.1795

Squared Deviation Product 0.07868 0.011802038 0.00009 5.86625E-05 0.03222 0.00644405 Variance = 0.01830

Chapter 13
Question 8 Input area:

Weight of G Weight of J Weight of K Stock G E(R) Stock J E(R) Stock K E(R)

25.00% 55.00% 20.00% 8.00% 15.00% 24.00%

Output area:

Portfolio E(R)

15.05%

Chapter 13
Question 9 Input area:

State Recession Boom a. b. weights weights

Probability 0.35 0.65

Stock A 0.07 0.13 0.33 0.20

Stock B 0.15 0.03 0.33 0.20

Stock C 0.33 (0.06) 0.33 0.60

Output area:

a.

Stock A Recession Boom

Probability 0.35 0.65

Portfolio Return 0.1833 0.0333 E(R) =

Product 0.0642 0.0217 0.0858

b.

Stock A Recession Boom

Probability 0.35 0.65

Return 0.2420 (0.0040) E(R) =

Product 0.0847 (0.0026) 0.0821

Return Deviation 0.1599 (0.0861)

Squared Deviation Product 0.02557 0.008948804 0.00741 0.004818587 Variance = 0.013767

Chapter 13
Question 10 Input area:

State Boom Good Poor Bust weights

Probability 0.15 0.45 0.35 0.05

Stock A 0.30 0.12 0.01 (0.06) 0.30

Stock B 0.45 0.10 (0.15) (0.30) 0.40

Stock C 0.33 0.15 (0.05) (0.09) 0.30

Output area:

Stock A Boom Good Poor Bust

Probability 0.15 0.45 0.35 0.05

Portfolio Return 0.3690 0.1210 (0.0720) (0.1650) E(R) = 15.61%

Product 0.0554 0.0545 (0.0252) (0.0083) 0.0764

Return Deviation 0.2927 0.0447 (0.1484) (0.2414)

Squared Deviation Product 0.08564 0.012846603 0.00199 0.00089713 0.02201 0.007702703 0.05825 0.002912491 Variance = 0.02436

Standard Deviation =

Chapter 13
Question 11 Input area:

Weight of Q Weight of R Weight of S Weight of T Beta of Q Beta of R Beta of S Beta of T

25.00% 20.00% 15.00% 40.00% 0.84 1.17 1.11 1.36

Output area:

Portfolio E(R)

1.15

Chapter 13
Question 12 Input area:

Weight of risk-free Weight of Stock A Weight of Stock B Beta of risk-free Beta of Stock A Beta of Portfolio

33.33% 33.33% 33.33% 0.00 1.38 1.00

Output area:

Beta of Stock B

1.62

Chapter 13
Question 13 Input area:

Beta Market E(R) Risk-free return

1.05 11.00% 5.20%

Output area:

Stock E(R)

11.29%

Chapter 13
Question 14 Input area:

Stock E(R) Risk-free return Market risk premium

10.20% 4.50% 8.50%

Output area:

Stock beta

0.67

Chapter 13
Question 15 Input area:

Stock E(R) Stock beta Risk-free return

13.50% 1.17 5.50%

Output area:

Market E(R)

12.34%

Chapter 13
Question 16 Input area:

Stock E(R) Stock beta Market E(R)

14.00% 1.45 11.50%

Output area:

Risk-free

5.94%

Chapter 13
Question 17 Input area:

Stock beta Stock E(R) Risk-free return a. b. c. d. Weight of stock Portfolio beta Portfolio E(R) Portfolio beta

1.35 16.00% 4.80% 50.00% 0.95 8.00% 2.70

Output area:

a. Portfolio E(R) b. Weight of stock Weight of risk-free c. Weight of stock Portfolio beta b. Weight of stock Weight of risk-free

10.40% 0.7037 0.2963 0.2857 0.386 200.00% -100.00%

The portfolio is invested 200.00% in the stock and -100.00% in the risk-free asset. This represents borrowing at the risk-free rate to buy more of the stock.

Chapter 13
Question 18 Input area:

Stock E(R) Stock beta Risk-free return

15.20% 1.25 5.30%

Output area:

Slope of SML =

0.0792

Weight of W Portfolio E(R) 0.00% 5.30% 25.00% 7.78% 50.00% 10.25% 75.00% 12.73% 100.00% 15.20% 125.00% 17.68% 150.00% 20.15%

Portfolio beta 0.000 0.313 0.625 0.938 1.250 1.563 1.875

Chapter 13
Question 19 Input area:

Stock Y beta Stock Y E(R) Stock Z beta Stock Z E(R) Risk-free rate Market risk premium

1.30 18.50% 0.70 12.10% 8.00% 7.50%

Output area:

SML reward-to-risk Reward-to-risk ratios Stock Y Stock Z Return predicted by CAPM Stock Y Stock Z Stock Y is Stock Z is

0.0750

0.0808 0.0586

17.75% 13.25% undervalued overvalued

Chapter 13
Question 20 Input area:

Stock Y beta Stock Y E(R) Stock Z beta Stock Z E(R) Market risk premium

1.30 18.50% 0.70 12.10% 7.50%

Output area:

Risk-free rate

4.63%

Chapter 13
Question 21 Input area:

Large-company stocks Long-term government bonds Small company stock Treasury bills

12.30% 5.80% 17.10% 3.80%

Output area:

Large-company stocks and long-term government bonds portfolio Small company stocks and Treasury bill portfolio

9.05%

10.45%

Chapter 13
Question 22 Output area:

(E[RA] - RF)/A = (E[RB] - RF)/B RPA/A = RPB/B B/A = RPB/RPA

Chapter 13
Question 23 Input area:

State Boom Normal Bust weights b. c. T-bill rate Inflation rate

Probability 0.35 0.50 0.15

Stock A 0.24 0.17 0.00 0.40

Stock B 0.36 0.13 (0.28) 0.40

Stock C 0.55 0.09 (0.45) 0.20

3.80% 3.50%

Output area:

State Boom Poor Bust

Probability 0.35 0.50 0.15

Portfolio Return 0.350 0.138 (0.202) E(R) = 18.04% 12.32%

Product 0.1225 0.0690 (0.0303) 0.1612

Return Deviation 0.1888 (0.0232) (0.3632)

Squared Deviation Product 0.03565 0.012475904 0.00054 0.00026912 0.13191 0.019787136 Variance = 0.03253

Standard Deviation b. Expected risk premium c. Approximate expected real return Exact expected real return Approximate expected real risk premium Exact expected real risk premium

12.62% 12.19% 12.32% 11.90%

Chapter 13
Question 24 Input area:

Portfolio beta Total investment Asset Stock A Stock B Stock C Risk-free asset

1.00 1,000,000 Investment 210,000 320,000 Beta 0.85 1.20 1.35

$ $

Output area:

Asset Stock A Stock B Stock C Risk-free asset

Investment $ 210,000.00 $ 320,000.00 $ 324,074.07 $ 145,925.93

Beta 0.85 1.20 1.35 0.00

Chapter 11
Question 25 Input area:

Total investment Portfolio E(R) Stock X E(R) Stock X beta Stock Y E(R) Stock Y beta

$100,000 18.50% 17.20% 1.40 13.60% 0.95

Output area:

Weight of Stock X Weight of Stock Y Dollar amount in X Dollar amount in Y Portfolio beta

1.36111 -0.36111 $ 136,111.11 $ (36,111.11) 1.56

This represents shorting Stock Y.

Chapter 11
Question 26 Input area:

State Recession Normal Boom Market risk premium Risk-free rate

Probability 0.25 0.50 0.25 8.00% 4.00%

Stock I 0.11 0.29 0.13

Stock II (0.40) 0.10 0.56

Output area:

Stock I Recession Normal Boom

Probability 0.25 0.50 0.25

Return 0.11 0.29 0.13 E(R) = 8.53% 2.06

Product 0.0275 0.1450 0.0325 0.2050

Return Deviation (0.0950) 0.0850 (0.0750)

Squared Deviation 0.00903 0.00723 0.00563 Variance =

Product 0.00225625 0.0036125 0.00140625 0.00728

Standard Deviation = Stock I beta = Stock II Recession Normal Boom Probability 0.25 0.50 0.25

Return (0.40) 0.10 0.56 E(R) = 33.96% 0.63

Product (0.1000) 0.0500 0.1400 0.0900

Return Deviation (0.4900) 0.0100 0.4700

Squared Deviation 0.24010 0.00010 0.22090 Variance =

Product 0.060025 5E-05 0.055225 0.11530

Standard Deviation = Stock II beta =

Although Stock II has more total risk than Stock I, it has much less systematic risk, since its beta is smaller than I's. Thus I has more systematic risk, and II has more unsystematic and total risk. Since unsystematic risk can be diversified away, I is actually the "riskier" stock despite the lack of volatility in its returns. Stock I will have a higher risk premium and a greater expected return.

Chapter 13
Question 27 Input area:

Beta Pete beta Repete beta 1.35 0.80

Expected return 13.20% 10.10%

Output area:

Risk-free rate Market return With Pete With Repete

5.59%

11.23% 11.23%

Chapter 13
Question 28 Input area:

State Bust Normal Boom

Probability 0.15 0.70 0.15

Stock A (0.08) 0.13 0.48

Stock B (0.05) 0.14 0.29 0.25

Amount Stock A's beta exceeds Stock B's beta

Output area:

a.

Stock A Recession Normal Boom

Probability 0.15 0.70 0.15

Return (0.08) 0.13 0.48 E(R) = Return (0.05) 0.14 0.29 E(R) =

Product (0.0120) 0.0910 0.0720 15.10% Product (0.0075) 0.0980 0.0435 13.40%

Stock B Recession Normal Boom

Probability 0.15 0.70 0.15

b.

Slope of SML

6.80% equals the market risk premium.