Financial Math Answers

Security               Weight      Alpha      Beta   Residual variance

                               W_i                                     

   A                        0.2           2.0          1.7             370

   B                        0.1           3.5           0.5            240

   C                        0.4           1.5           0.7            410

   D                        0.3           0.75         1.3            285

Portfolio value       1.0          1.575       1.06         108.45

       i.           Portfolio alpha,                                                                                                     

     ii.           Portfolio beta                                                                                                          

   iii.           Portfolio residual variance                                                                                 

1 32 2.10 50

2 30 1.80 35

3 25 1.65 42

4 20 1.30 26

5 18 1.15 29

6 15 0.85 18

7 14 0.75 20

8 12 0.50 17

Market 16 1.00 25

Index

Govt security 7.5 0 0

a. In terms of security market lines, which of the securities listed above are undervalued? (3mks)

b. Assuming that a portfolio is constructed investing equal proportion of funds in each of the above securities, what is the expected return and risk of such a portfolio? (3mks)

Assume you are provided with the following data:

Stock Number of Shares Price of T P rice (T+1)

L auren Corp 1,000.000 60 80

Kayleigh co. 10,000,000 20 35

Madison LTD 30,000,000 18 25

(a) Construct a price-weighted index for these three stocks, and compute the percentage change in the series for the period from T to T +1 (3mks)

(b) Construct a market-value-weighted index for these three stocks, and compute the percentage change in the series for the period from T to T+1 (4mks)

(c) Briefly discuss the difference in the results for the two stock indexes (4mks)

(d) Discuss the three common mistakes that can bias the results against the Efficient Market Hypothesis (3mks)

A buyer and a seller agreed following about the price of an earth mover: The buyer pays

• 13215 € after 4 months and
• 71709 € after 8 months

Calculate the price of an earth mover, when the whole purchase price is paid after 6 months from the purchase moment. Use annual interest rate of 3.8 %