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ADM 3352 nyse Fall 2212 ‘Question 1 (20 points) Vv You expect a risky asset to be worth $50 at the end of the year if the state of economy is good, and $25 if the state of economy is bad. The asset is to pay $1.50 dividend per year regardless the state of the economy. The probabilities of the good and bad states are 0.6 and 0.4, respectively. (1) (10 points) If you require a risk-adjusted return of 15% per year, how: much are (Oo you willing to pay for the asset today? (2) {10 points) The market consensus on this asset is that it should have a beta of 1.4, ‘The riskfree interest rate is 3%, and the market risk premium is 8%. If your ‘expectation on the asset remains valid, what should the fair market value of the asset be today? (Extra space on the next page) » “oock 50 a6 bad Oh Epy f0.0.6 paca Eq = =Pa Question 2 (20 points) The yield on a 3-month Treasury bill is 2% per year. The expected return on SPY (the exchange-trade-fund (ETF) on the S&P 500 index) is 10% per year with a standard deviation of 20%. The cost of borrowing money is 4% per year. (1) (10 points) If you require 7% expected return on your complete portfolio, how ee should you invest? What is the risk of your complete portfolio? c 9? ao pote) ee os eee return, how should you invest? What is (Extra space on the next page) Eos =) 4 4 46 (2) Fay =e +y8o) Th aU-yi2t ty Wh segpep oa, he =a Hy pe ae es aa 5. Sea — ny =9.315 yf should berrowe 50%, to invest A=46 Bs Iso, om ELE, the 7th §2f 0.2295 Toes shall invest 325 % on Freosany bill, af oo and 62%, on ETF, fhe ; compbh pr Question 3 (20 points) Assume that there is no riskfree asset. As a result, an investor is limited to two risky assets. Below is the information on the two assets: EG@)=U% (O11), E(y)=17% (0.17), 9,=24% (0.24), 0,=36% (036), cov(7,7,) = 215(%)? (0.0215). The investor decides to invest in asset 1 only, because he is afraid of risk. You are required to present the best alternative to the investor. Be numerically specific. (Extra space on the next two pages) eo lily) —_ 936" 2.0215 Be : : Beer Beatie) = page saa LEE = T4970 = 9S \ Wr = LAaPef]e 02503 GS, Ee = wiEn) 4y-€en) = 0797-0 ¢ 0. 21503-2017 01) CExprctel retean) p= WG, te =o.TAT 2.247 + 02 piewscvln hn) * 1 2-01497 0.2603 - 0.02 = 0.03237 tooo 8!2 t9,00507 = 00 F85% (erin ) i) 0.2495 =9.22 (Sta