Finance practice

1377 WordsApr 1, 20146 Pages
MGF402 Homework 3 Due date: Thursday October 31st 1. Calculate EAR and APR for the following questions. a. You have an APR of 7.5% with continuous compounding. What is the EAR? b. You have an EAR of 9%. What is the equivalent APR with continuous compounding? c. The buyer of a new home is quoted a mortgage rate of 0.5% per month. What is the APR on the loan? d. A loan for a new car costs the borrower 0.8% per month. What is the EAR? Answer: a. 1 + EAR = e­­APR => EAR = eAPR - 1 = e.075 - 1 = 7.79% b. 1 + 9% = eAPR => Ln(1.09) = Ln(eAPR) = APR APR = Ln(1.09) = 8.62% c. 0.5% x 12 = 6% d. (1.008)12 - 1 = 10.03% 2. Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk…show more content…
The T-bill rate is 7%. 7. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. a. What is the expected return and standard deviation of your client’s portfolio? b. Suppose your risky portfolio includes the following investments in the given proportions. Stock A 27% Stock B 33% Stock C 40% What are the investment proportions of your client’s overal portfolio, including the position in T-bills? c. What is the reward-to-volatility ratio (S) of your risky portfolio and your client’s overal portfolio? d. Draw the CAL of your portfolio on an expected return/standard deviation diagram. What is the slop of the CAL? Show the position of your client on your fund’s CAL. Answer: a. E[rC] = .7 x 17% + .3 x 7% = 14% σC =
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