Finance

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Author:
bmercil
ID:
55673
Filename:
Finance
Updated:
2010-12-13 17:43:15
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  1. Purchased $1120
    Sold $1085
    Coupon $120
    Find Dollar Return
    • Dollar Return = (1085-1120)+120
    • =$85
  2. Dollar Return $85
    Purchased $1120
    Find Percent Return
    • Percent Return= 85/1120
    • =7.6% (Nominal= not adjusted for inflation)
  3. Nominal Return= 7.6%
    Inflation= 4%
    Find Real Return
    • (1+.076)=(1+.04)(1+r)
    • r=3.46%
  4. Economy Pi Ra Rb
    BOOM .40 30% -5%
    BUST .60 -10% 25%
    Expected Return?
    Risk?
    • E(Ra)=(.4)(.3)+(.6)(-.1)=6%
    • E(Rb)=(.4)(-.05)+(.6)(.25)=13%

    B has Higher Return

    • VarA=(.4)(.3-.06)2+(.6)(-.1-.06)2 =.0384
    • oA=Square root of .0384
    • =.196=19.6%
    • VarB=(.4)(-.05-.13)2 +(.6)(.25-.13)2 =.0216
    • oB= Square root of .0216
    • =.147=14.7%
  5. E(R) 6% 13%
    O 19.6% 14.5%

    What is the Portfolio Return and Risk
    • Method 1
    • A=25% | E(Rp)=(.25)(.06)+(.75)(.13)=
    • B=75% |11.25%

    • Method 2
    • Boom .4 | (.25)(.3)+(.75)(-.05)=3.75%
    • Bust .6 | (.25)(-.1)+(.75)(.25)=16.25%
    • E(Rp)=(.4)(.0375)+(.6)(.1625)= 11.25%

    • If portfolio risk is needed, use second method
    • Varp=(.4)(.0375-.1125)2 +(.6)(.1625-.1125)2 =.00375
    • Op=Suqare root of .00375
    • =.06123=6.1%

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