MBA January Intake HEC Paris

Financial Markets Philippe Henrotte

Homework of Lecture 3
Portfolio Theory
Ishan ANAND

answers to be submitted electronically on

www.henrotte.eu
before midnight Monday 17 February 2020

For all questions in the two problems, give your answer as a number with four decimal
precision, for instance enter −0.1234 if your answer is −12.34%.

Problem 1. Portfolio Return (4 points)

You own a portfolio which consists of three stocks: 300 shares of Apple Computer, 8000
shares of Cisco Systems, and 5000 shares of Johnson & Jonhson. The current share prices
and expected returns of Apple, Cisco, and J&J are, respectively, USD 549, USD 24, USD
110 and 12%, 10%, 8%.

Question 1. (1 point) What is the portfolio weight of Apple Computer in your portfolio?

Question 2. (1 point) What is the expected return of your portfolio?

Question 3. (1 point) Suppose the price of Apple stock goes up by USD 25, Cisco rises
by USD 5, and J&J falls by USD 13. What is the new portfolio weight of Apple Computer
in your portfolio?

Question 4. (1 point) Assuming the stocks’ expected returns remain the same, what is
the expected return of the portfolio at the new prices?

Problem 2. Leverage (4 points)

Suppose you have EUR 100,000 in cash, and you decide to borrow another EUR 50,000
at a 5.8% interest rate to invest in the stock market. You invest the entire EUR 150,000 in
a portfolio P with a 15.1% expected return and a 29.2% volatility.

Question 5. (1 point) What is the expected return of your investment?

Question 6. (1 point) What is the volatility (standard deviation) of your investment?

Question 7. (1 point) What return do you realize if the portfolio P experiences a positive
return of 20% over the year?

1
Question 8. (1 point) What return do you realize if the portfolio P experiences a negative
return of −20% over the year?

Problem 3. Hedge Fund Portfolio (3 points)

A hedge fund has created a portfolio using just two stocks. It has shorted USD 35,000,000
worth of GE stock and has purchased USD 85,000,000 of Intel stock. The correlation
between GE and Intel returns is 0.66. The expected returns and standard deviations of the
two stocks are given in the following table

Expected Return Volatility

GE 10.15% 45.00%
Intel 14.86% 35.00%

Question 9. (1 point) What is the expected return of the portfolio?

Question 10. (1 point) What is the volatility of the portfolio?

Question 11. (1 point) Suppose the correlation between the returns of GE and Intel in-
creases, but nothing else changes. Would the volatility of the portfolio increase or decrease?