Question

Name: Year Market Dell HP 30% 47% a) Calculate the expected average rate of return and the standard deviation on each of the two alternatives: Dell and HP, in addition to the market index. b) Calculate the coefficient of Correlation between Dell and HP. c) Suppose you created a 2-stock portfolio by investing $75,000 in Dell and $25,000 in HP, calculate the expected return, the standard deviation, and the coefficient of variation (CVp) for this portfolio. d) Use the previously calculated standard deviations for Dell, HP and the market in question (a) to estimate Dell's and HP's betas e) If the risk free rate equals 4%, and the expected rate on the market equals 9%, find the required rate of return on Dell and HP. f) Would you purchase Dell and/or HP? Why? g) Suppose you form a portfolio with $1.4 million in Dell and $0.6 million in HP, what is the required Return on the Portfolio?

Answer 1

I Calculation of 3 ou market expected retum & SD. Year Ro Return on market (n) (non- 300 ५१५ 18. -22 900 ५१५ 10 334 26 ann an HRFILM ILLUND D DDV 324 324 121 900 3642 38 80 Expected return (n) = {n = 80 - 8%. s 3642 J 10 19.0890 Scanned with CamScanner

Calculasier of expread return ___emon lau Return (m) 26 15 -14 -15 IN/ dTorro १५.16 73.16 ५ .16 457.96 १.36 S95.36 1211.36 556.6 474.56 466.56 5712.4 42 20 -32 24 Lupaired robon () = 2n = ६५ ___8D (6) = [n- 52.५ - 23.१० Scanned with CamScanner

I Calculation JP of expected retuun & SD on Return(n) 41 -S4 15 --21 (non) 142१.२५ ११५.24 33.64 ५.१५ 1383.१५ १५.64 60.84 1036.84 ।24.24 4329.64 1339ऽ.. 17 -dcart n n n n L FATAFATALAMAADHIM -23 75 92 3 Expected return (m) = 92 = 9.2% SS(O)- En: 133956 10 36.6000 ___ Scanned with CamScanner

(a) Expected return Market = 890 Dell = 6. HP = 9.290 Standard deviation Market i 19.08%. Dell = 23-90%. HP = 36.60%. (b) Calculation of coefficient of correlation 47 1 -54 15 19-6 8.6 . -2004 7 -21.4 -4.4 - 24.4 3506 23.6 - 38.4 2106 37.8 -63.2 5.8 -2.2 37.2 30,8 7.8 -32.2 -13.2 65.8 BI Juoto 40 740.88 € -543.52 - 118.32 47.08 163.68 -751.52 277.68 -759.92 506.88 1421.289 १६4.2 30 -23 -32 28 Scanned with CamScanner 75

2 Covariance (in, y) = {(n-n) Lyri) = 98402 10 98.421907 Coefficient of correlation - Cov/nul bn by = Doll - 98042. 23.90 36-60 co Investment in Dell = $ 75000 Investment in HP -9 25000 & Woen = 0.75 i WHP = 0.25 = Weighted average - 0.75 x 6.4 +0.25 9.2 = 4o8t 2.3 o 7.190 S ca scanner L amScanner

- 16. 178)(23.90)** (0-21) (36-40)*+ 2x0145 X0:25 x 98.42 √321.31 +93.72 +36-91 - 21.02% coefficient of variation = SD X 100 X 100 21-02 7.1 296.06990 CS Scanned with CamScanner

6 K. 6 nokeS Retun Noir Mook k้ (๒) |y) (1) (น4 ในปี 22. 19. 13.22 26 2p 18 -ไฯ 19 26 “S -20.ฯ -2sY -21-9 V3 92 -22 -1S -[ฯ -1 | |4| ศ 1 M 2 4 ฮ9| | 25 18 . 3 -14 236 -21 -24.ฯ 20 21- Vog _v2y. Qo69 698 539 22 2w ()2579 - 2529 (1) - 0-S4 Y - 2539 (-68x23.ใe HUB 8 - YX SB ball - 953 x 60 (9.69 SD market " 0. Scerned with Se Scanner

HPreturn Omaalka 20 41 1 -54 20 -1 ____ 10 -30 -22 37. -63.2- 5 -2.2 -31.2 -32.2 8311 63.2 र न ए क पू.५ -22 - 4 ० -2 ५० 1118 61- Ти по е 26 -10 -22 १०.५ 29.6 277.2 -3 -3 -५ -32.2 -13.2- cs. 0 38 -2 30 _ 1974 पहन Gav (my) - ५१२० - ५६३.) १- ५९२ 19.02x36.60 - 0.0 B2 0.70x36.60 9.08 - 1.34 Statiredovith CamScanner

Rm = 990 we know Re = Rf + (Rm - Rp) & Dell = 4+ (9-4) 0.71 27.55 7. HP = ut (9-4) 1.34 - Scanned with CamScanner

b) Coefficient of warration Dell = 23.90 x 100 = 373.43%. - 6.4 HP = 36060 x 100 = 397.830. 9.2 lower the As coefficient of variation is the better ... pллаха Пu . g) Innestment in Dell = $1.4m gruestment in Ho &oobim When = 0.7 WHP = 0.3 E(Rp) = Weighted average = 0.7x 6.4 + 0.3x9.2 - 4.48 of 2.76. - 7.241. *for accuracy, figures have been -crrounded off to 2 decimals Scanned with CamScan