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a. Allocating 70% of the capital in the risky portfolio P, and 30% in risk-free asset, the client… 1 answer below » a. Allocating 70% of the capital in the risky portfolio P, and 30% in risk-free asset, the client has an expected return on the complete portfolio calculated by adding up the expected return of the risky proportion (y) and the expected return of the proportion (1 – y) of the risk-free investment: Document Preview: Chapter 2
2.
While the DJIA has 30 large corporations in the index, it does not represent the overall market nearly as well as the more than 5000 stocks contained in The View complete question » a. Allocating 70% of the capital in the risky portfolio P, and 30% in risk-free asset, the client has an expected return on the complete portfolio calculated by adding up the expected return of the risky proportion (y) and the expected return of the proportion (1 – y) of the risk-free investment: Document Preview: Chapter 2
2.
While the DJIA has 30 large corporations in the index, it does not represent the overall market nearly as well as the more than 5000 stocks contained in The Wilshire index. The DJIA is simply too small.
11.
(a) A repurchase agreement is the sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.
14.
After-tax yield = Rate on the taxable bond x (1 – Tax rate)
The taxable bond. With a zero tax bracket, the after-tax yield for the taxable bond is the same as the before-tax yield (5%), which is greater than the 4% yield on the municipal bond.
The taxable bond. The after-tax yield for the taxable bond is: 0.05 x (1 – 0.10) = 0.045 or 4.50%.
Neither. The after-tax yield for the taxable bond is: 0.05 x (1 – 0.20) = 0.4 or 4%. The after-tax yield of taxable bond is the same as that of the municipal bond.
The municipal bond. The after-tax yield for the taxable bond is: 0.05 x (1 – 0.30) = 0.035 or 3.5%. The municipal bond offers the higher after-tax yield for investors in tax brackets above 20%.
17.
You would have to pay the asked price of:
98% of par = $980.00
The coupon rate is 4.25%, implying coupon payments of $42.5 annually or, more precisely, $21.25 (= 42.5/2) semiannually.
Given the asked price and coupon rate, we can calculate current yield with the formula:
Current yield = = 4.25/98 = 0.0434 = 4.34%
18.
The closing price today is $75.60, which is $0.97 above yesterday’s price. Therefore, yesterday’s closing price was: $75.60 – $0.97 = $74.63.
You would buy 66 shares: $5,000/$75.60 = 66.14.
Your annual dividend income on 66 shares would be 66 x $1.88 = $124.08.
Earnings per share can be derived from the price-earnings (PE) ratio:
Given price/Earnings = 10.92 and Price = $75.60, we know that
Earnings per Share = $75.60/10.92 = $6.92.
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At t = 0, the value of the index is: ($90 + $50 + $100)/3 = 80
At t = 1, the value of the index is: ($95 + $45 +… Attachments: ch-2-examples….docx View less » Jan 31 2016 10:57 AM
