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(Solved) I need help working on the questions with work provided. Thank you


I need help working on the questions with work provided. Thank you


1. DKG stock has the following probability distribution of expected prices one year from

 

now:

 

State

 

1

 

2

 

3

 


 

Probability

 

.25

 

.40

 

.35

 


 

Price

 

$50

 

$60

 

$70

 


 

(1) If you buy DKG stock today for $55 and it will pay a dividend during the year of

 

$4 per share, what is your expected holding period return on DKG?

 

(2) If instead, you require a risk premium of 5% and Rf is 4%. What is the price you

 

are willing to pay today for DKG? Assuming the stock will pay a dividend of $4

 

per share.

 

2. You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P,

 

constructed with 2 risky securities, X and Y. The weights of X and Y in P are 0.60 and

 

0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y

 

has an expected rate of return of 0.10 and a variance of 0.0081. The coefficient of

 

correlation, rho, between X and Y is 0.45.

 

a. If you desire to form a portfolio with an expected rate of return of 0.11, what

 

percentage of your money must you invest in the T-bill and P, respectively?

 

b. If you desire to form a portfolio with a standard deviation of 5.59%, what

 

percentages of your money must you invest in the T-bill, X, and Y respectively?

 

c. What would be the dollar values of your positions in X and Y, respectively, if you

 

decide to hold 40% of your money in the risky portfolio and 60% in T-bills?

 

d. What would be the dollar value of your positions in X, Y, and the T-bills,

 

respectively, if you decide to hold a portfolio that has an expected outcome of

 

$1,200?

 


 

 


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