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PLEASE ANSWER ALL 6 QUESTIONS BELOW, PARTICULARLY QUESTIONS 5 AND 6. THANKS.

.You have the following information for Dell Inc.: 5%, 15%, -10%, 25%.

1. Calculate the average return and standard deviation for a population for Claymore.

2. The S&P 500 market portfolio has a standard deviation of 20%.Claymore Inc. has a beta of .57.Find the correlation between Claymore and the S&P 500.HINT: The formula for beta can help you get the correlation.

3. The S&P market portfolio has a return of 15%.Ten-year T-bonds (risk-free asset) have a return of 2.5%.Use Claymore’s beta of .57 to estimate the required return for the stock.

4. If you put $120,000 into Claymore and $40,000 into the S&P 500, find the return and standard deviation of your portfolio.

5. You estimate the expected return on Dell’s stock at 16%. If the market is efficient, what will happen to the price of Dell? Explain.

6. Dell announces a new project. The new project has a beta of 1.5 and an expected return (IRR) of 20%. Is the project a good idea? Explain.

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Bunny Greenfelder
Bunny GreenfelderLv2
28 Sep 2019

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Please show formulas and calculations and not just results and numbers, and explain rationale for answers. Whenever applicable, interest is compounded annually and payments occur at the end of the period. Face value for bonds is $1000.

You have the following information for Dell Inc.: 5%, 15%, -10%, 25%.

a. Calculate the average return and standard deviation for a population for Dell Inc.

b. The S&P 500 market portfolio has a standard deviation of 20%. Dell Inc. has a beta of .57. Find the correlation between Dell and the S&P 500. HINT: The formula for beta can help you get the correlation.

c. The S&P market portfolio has a return of 15%. Ten-year T-bonds (risk-free asset) have a return of 2.5%. Use Dell’s beta of .57 to estimate the required return for the stock.

d. If you put $120,000 into Dell and $40,000 into the S&P 500, find the return and standard deviation of your portfolio.

e. Based on additional research, you estimate the expected return on Dell’s stock at 16%. If the market is efficient, what will happen to the price of Dell? Explain.

f. Dell announces a new project. The new project has a beta of 1.5 and an expected return (IRR) of 20%. Is the project a good idea? Explain.

1. Security C has an expected return of 6% and a standard deviation of 3% while security D has an expected return of 10% and a standard deviation of 7%. The correlation of returns between the two securities is –1.

a) If you place half of the money in each stock, then what is the expected return of this portfolio?

b) If you place 20% of the money in stock C and the remaining in stock D, then what is the expected return of the portfolio?

c) What is the portfolio standard deviation in b above?


2. a) A security has a beta of 1.5 when the risk-free rate is 2.6 percent and the expected return on the market is 12 percent. Calculate the expected return on the security.

b) If the beta on the security in a) increases to 2.5, what is the new expected return? Why does the expected return increase as the beta increases?

Additional Requirements

Level of Detail: Show all work

Market portfolio has an expected return of 11% and volatility of 20%. Risk-free rate is 3%. Security X and Y have betas of 1.4 and 0.9 respectively.

a) According to CAPM, what are the expected return of X and Y?

E(rm)-rf = 11% - 3% = 8%

3% +1.4*8% = 14.2%

3% +1.4 *8% = 10.2%

b) What should be X worth today, if X pays a dividend of $1.2 one year from today and is priced at 30 one year from today? The required rate of return is the expected return using CAPM from part a).

c) If security X has expected return of 15%, is it underprice/overprice/fairly priced according to CAPM? What is its alpha?

d) Plot SML and label X, Y and Market portfolio on the line.

e) What is the beta of a portfolio with 50% in X and 50% in Y?

f)What is the beta of a portfolio with 55% in Market portfolio and 45% in risk-free asset?

g) You are investing in a complete portfolio. The complete portfolio is composed of risk-free asset and a risky portfolio, P, constructed with 20% in X and 80% in Y. It turns out that your complete portfolio has an expected rate of return of 9.4%. What is the beta of your complete portfolio? (hint: you may or may not use all information to solve this problem)

Q2. Stock A has a beta of 1 and standard deviation of 50%. Market portfolio has a standard deviation of 20%. What is the correlation of stock A with the market portfolio? How much of stock A’s total risk is due to market risk?

Q3. Assume the risk-free rate is 8% and the expected rate of return on the market is 18%. A stock has an expected return of 6%. What is its beta?

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