# Finance

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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%
 Author: bmercil ID: 55673 Card Set: Finance Updated: 2010-12-13 22:43:15 Tags: Examples Folders: Description: Final Show Answers: