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