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BUS593 homework 1




Question;1.;An investor is in the 30% tax bracket. If corporate bonds offer 9% yields, what must;municipals offer for the investor to prefer them to corporate bonds?;2.;The Closed Fund is a closed-end;investment company with a portfolio currently worth $200 million. It has liabilities of $3 million and 5;million shares outstanding.;a.;What is the NAV of the fund?;b.;If the fund sells for $36 per;share, what is its premium or discount as a percent of NAV?;3.;Suppose that the rate of;inflation is expected to be 1% over the next five years. What are your best estimates of the expected;rate of return on Treasury bills, Treasury bonds and large capitalization;common stocks?;4.;Assume the expected return on;the S&P 500 portfolio is 14% and the T-bill yield is 5%. The standard deviation of the S&P500;portfolio is 20%. What are the expected;returns and variances of portfolios invested in T-bills and the S&P 500;with S&P weights 0%, 10%, 20%, 30%, 40%, 50%, 60%, 70%, 80%, 90%, and 100%. What is the maximum utility portfolio for an;investor with risk aversion parameter A=3?;What about A=5?;5.;Suppose you manage a risky;portfolio with expected return 18% and standard deviation 28%. The Treasury bill rate is 8%. Suppose your client invests 70% in your;portfolio and 30% in Treasury bills.;a.;What is the expected return and standard;deviation of the client?s portfolio?;b.;What is the Sharpe ratio for;your portfolio? Your client?s portfolio?;c.;Draw the Capital Allocation;Line for your portfolio. What is its?;slope?;d.;Suppose the client?s degree of;risk aversion is 3.5, what should be the proportion of client assets invested;in the risky portfolio?;e.;Suppose there is a passive;portfolio available with expected return 13% and standard deviation 25%. Draw the Capital Market Line and compare it;to your fund?s CAL. What is the;advantage of your fund?;f.;Is there any advantage of your;client moving to the passive fund?;g.;What is the maximum fee you can;charge before it is advantageous for the client to move?;6.;Suppose there are two risky;assets, a stock fund (S) with ER 20% and SD 30% and a bond fund (B) with ER 12%;and SD 15%, the correlation between S and B is 10% and the risk free asset;yields 8%.;a.;What are the investment;proportions in the two funds that create the minimum-variance portfolio?;b.;Draw the investment opportunity;set for the two risky funds.;c.;Draw a tangent line from the;risk-free rate to the opportunity set.;d.;What are the proportions of the;two risky funds in the optimal risky portfolio?;e.;What is the Sharpe Ratio for;the optimal risky portfolio?;7.;Suppose the price per share of;XYZ stock at the beginning of years 2005, 2006, 2007, 2008 is $100, $120, $90;and $100, respectively. The stock pays a;$4 dividend per share each year. Suppose;you buy 3 shares of XYZ at the beginning of 2005, buy another two shares at the;beginning of 2006, sell one share at the beginning of 2007, and sell all four;remaining shares at the beginning of 2008.;What are the arithmetic and geometric average time-weighted rates of;return? What is the dollar weighted rate;of return?;8.;CFA Problem 28.5 ? Jarvis;University Endowment fund;9.;Consider Karl, an individual;investor. Karl is 40 years old, earns;after-tax income of $50,000 per year, expects to retire at age 65, and receive;after-tax Social Security payments in retirement of $20,000/year. Karl has a current net worth of $125,000 and;the after-tax return on investment is 1% per year. He believes he will continue to earn $50,000;per year in real terms over the next 25 years.;Assuming Karl believes he may live as long as 100 years, what is the;maximum steady rate of consumption that he can maintain while keeping net worth;positive through age 100? How does your;answer change if the return on investment is 3% per year instead of 1%?;10.;In EXCEL, replicate the five;year financial projections for Bill Ackman?s lemonade business. Extend the projections out to ten years using;the assumption that you invest in as many new lemonade stands you can given the;cash balance at the beginning of the year.


Paper#50409 | Written in 18-Jul-2015

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