Subandi 11180013 Mid Term

1. Over the past year you earned a nominal rate of interest of 30 percent on your money.
The
inflation rate was 15 percent over the same period. The exact actual growth rate of your
purchasing power was ____________.
R = 30%
I = 15%
𝑟=((1+𝑅))/ 13.04%
((1+𝐼)) -1
2 An investment provides a 2.1% return quarterly, its effective annual rate is ________.
𝑟= 〖 (1+2,1%) 〗 ^4−1
r 2.10%
annual rate 8.67%
3 You have been given this probability distribution for the holding-period return for KMP
stock:
State of the economy Probability HPR

Boom 0.3 18%
Normal growth 0.5 12%
Recession 0.2 -5%
What is the expected holding-period return for KMP stock?
HPR 10.40%
4 You invested $1000 in Indonesian stocks at the beginning of 2020, and lost 20% in 2020. What rate of r
Investmet 1,000
Lost 20%
5000
4,000
Original value 200
years 2018 2019 2020

Return 12,3% 5,6% 11,7%
5 What is arithmetic average annual return?
(0,123)(1/3)+(1/3)(0,056)(1/3)(0,117)
(0,041+0,019+0,039) 0,099 9,9%
What is geometric average annual return?
(1+12,3%)(1+5,6%)(1+11,7%)(1+r3)1/3-1
(1,123x1,056x1,1170)1/3-1 0,558 5,58%
What is standard deviation of annual return?
9,9%+5,58% = 15,48% 0,393 3,93%
What is Sharpe ratio, if risk free return is 5%?
(9,9-5,8)/3,93 1,043
6 A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-
free rate is 6 percent. An investor has the following utility function: U = E(r) − (A/2)s 2 . What
value of A makes this investor indifferent between the risky portfolio and the risk-free
asset?
𝑈=𝐸(𝑟)−𝐴/ 〖 2(𝑆𝐷) 〗 ^2
expected return 0.15

std 0.15
risk-free rate 6%
0,006 = E (0,15)- A/2 x 0,0225
A = 8,0
n 2020. What rate of return is necessary for you to recover to its original value in 2021
7 According to the mean-variance criterion, which of the statements below is
correct?
Investment E(r) Std Coefficient of Variation

A 10% 5% 50%
B 21% 11% 52%
C 18% 23% 128%
D 24% 16% 67%
8 Slope of Capital Market Line :
For Passive Market portfolio :

Expected Return 10%
Standard Deviation 16%
Risk-Free Rate 7%
a Slope of MCL = 0.1875

so, Slope of Capital Market Line For Passive Market portfolio 0,1875
b Actively Managed Fund

Expected Return 15%
Standard Deviation 20%
Risk-Free Rate 7%
Slope of CAL = 0.4

so, Slope of Capital allocation line offered by the brokers fund 0,4
d Slope of CAL with fees =
(15%-F-7%)/20 = 0.1875
15-F = 10.75
F = 4,25
so, maximum free the broker can charge = 4,25%

9 Consider the following probability distribution for stocks A and B
State Probability Return on Stock A Return on Stock B

1 0.1 10% 8%
2 0.2 13% 7%
3 0.2 12% 6%
4 0.3 14% 9%
5 0.2 15% 8%
Expected return of Stock A and B are _______% and ________%, respectively.
E(RA) 13.20%
E(RB) 7.70%
10 Consider the following probability distribution for stocks A and B

1 0.1 10% 8%
2 0.2 13% 7%
3 0.2 12% 6%
4 0.3 14% 9%
5 0.2 15% 8%
The standard deviation of stocks A and B are _______ and _____ , respectively.
E(RA) 13.20%
E(RB) 7.70%

1 0.1 10% 8%
2 0.2 13% 7%
3 0.2 12% 6%
4 0.3 14% 9%
5 0.2 15% 8%
STD (A) 0.5906%

STD (B) 0.5402%
11 Covariance between Stocks A and B is ________.
1.1308%
12 Correlation between Stocks A and B is ________.

1,063
_______%, respectively.
and _____ , respectively.
Return on Stock A - E(RA) Return on Stock B - E(RB)

-3.20% 0.30%
-0.20% -0.70%
-1.20% -1.70%
0.80% 1.30%
1.80% 0.30%
13 Part (a)
Ra 3% + 0,7 Rm =Ea
Beta of A = Ba = 0,7
∂m = 20% = 0,20
R2a = 0.20 = Proportion of variance due to market / total variance of the stock A = (Ba x sigmam )2 / sigm
Hence, sigmaa2 = (Ba x sigmam )2 / R2a = (0.7 x 0.2)2 / 0.2 = 0.098
Hence, standard deviation of stock A, sigmaa = V0.098 = 0.3130 = 31.30%
Similarly,
sigmab2 = (Bb x sigmam )2 / R2b = (1.2 x 0.2)2 / 0.12 = 0.4800
Hence, standard deviation of stock B, sigmab = V0.48 = 0.6928 = 69.28%
Part (b)
For Stock A:
sigmaa2 = (Ba x sigmam )2 + sigma2(ea) = Systematic component + Firm specific component
Systematic component = (Ba x sigmam)2 = (0.7 x 0.2)2 = 0.0196
Firm specific component = sigma2(ea) = sigmaa2 - (Ba x sigmam )2 = 0.31302 - 0.0196 = 0.0784
Similarly for Stock B
Systematic component = (Bb x sigmam)2 = (1.2 x 0.2)2 = 0.0576
Firm specific component = sigma2(eb) = sigmab2 - (Bb x sigmam )2 = 0.69282 - 0.0576 = 0.4224
Part (c)
Covariance = Product of betas x market index risk
Cov (Ra , Rb) = Ba x Bb x sigmam2 = 0.7 x 1.2 x 0.202 = 0.0336
Correlation coefficient between the two stocks = Covariance / Product of standard deviations = Cov (Ra ,
14 Question a
As per CAPM, Return=Risk free rate+Market risk premium*beta

For $1 Discount store
4%+6%*1.5=13%
For Everything $5
4%+6%*1= 10%
Question b
A company is over priced if return as per CAPM>forecasted return, and underpiced if return as per CAPM
For $1 Discount store, return as per CAPM>forecasted return, it is overpriced.
For Everything $5, return as per CAPM<forecasted return, it is under priced.
15 Find the equilibrium rate of return on stock using APT. The T-bill rate is 6%.
1+r (0,12)(0,6) 0,072 7,2%

ock A = (Ba x sigmam )2 / sigmaa2
ecific component
02 - 0.0196 = 0.0784
82 - 0.0576 = 0.4224
andard deviations = Cov (Ra , Rb) / (sigmaa x sigmab) = 0.0336 / (0.3130 x 0.6928) = 0.1549
derpiced if return as per CAPM<forecasted return.
l rate is 6%.
16 There is an arbitrage opportunity. How would you organize your arbitrage portfolio? (You do no
17 Calculate expected excess returns (expected return – risk free return), alpha values and res
18 Construct the optimal risky portfolio. (Calculate the weight of passive portfolio and active
19 What is the Sharpe ratio of the optimal risky portfolio and how much of it is contributed b
trage portfolio? (You do not want to take the market risk. Thus, you have to remove it by selling one stock buy
eturn), alpha values and residual variances for these stocks.
passive portfolio and active portfolio.)
w much of it is contributed by the active portfolio?

20 the three different efficient market hypotheses ?
Weak Form EMH (Efficient Markets Hypothesis): Weak form EMH suggests that all past information is priced into s
above market averages in the short term. But no "patterns" exist. Therefore, fundamental analysis does not provide
Semi-Strong Form EMH (Efficient Markets Hypothesis): Semi-strong form EMH implies that neither fundamental an
information is instantly priced into securities.
Strong Form EMH (Efficient Markets Hypothesis): Strong form EMH says that all information, both public and privat
Strong form EMH does not say it's impossible to get an abnormally high return. That's because there are always out
ast information is priced into securities. Fundamental analysis of securities can provide you with information to produce returns
ental analysis does not provide a long-term advantage, and technical analysis will not work.
s that neither fundamental analysis nor technical analysis can provide you with an advantage. It also suggests that new
mation, both public and private, is priced into stocks; therefore, no investor can gain advantage over the market as a whole.
because there are always outliers included in the averages.
to produce returns
ts that new
rket as a whole.

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1. Over the past year you earned a nominal rate of interest of 30 percent on your money.

annual rate 8.67%

State of the economy Probability HPR

What is the expected holding-period return for KMP stock?

years 2018 2019 2020

What is Sharpe ratio, if risk free return is 5%?

expected return 0.15

0,006 = E (0,15)- A/2 x 0,0225

Investment E(r) Std Coefficient of Variation

8 Slope of Capital Market Line :

For Passive Market portfolio :

a Slope of MCL = 0.1875

b Actively Managed Fund

Slope of CAL = 0.4

d Slope of CAL with fees =

so, maximum free the broker can charge = 4,25%

State Probability Return on Stock A Return on Stock B

Expected return of Stock A and B are _______% and ________%, respectively.

10 Consider the following probability distribution for stocks A and B

State Probability Return on Stock A Return on Stock B

State Probability Return on Stock A Return on Stock B

STD (A) 0.5906%

11 Covariance between Stocks A and B is ________.

12 Correlation between Stocks A and B is ________.

and _____ , respectively.

Return on Stock A - E(RA) Return on Stock B - E(RB)

Hence, sigmaa2 = (Ba x sigmam )2 / R2a = (0.7 x 0.2)2 / 0.2 = 0.098

Hence, standard deviation of stock A, sigmaa = V0.098 = 0.3130 = 31.30%

sigmab2 = (Bb x sigmam )2 / R2b = (1.2 x 0.2)2 / 0.12 = 0.4800

Hence, standard deviation of stock B, sigmab = V0.48 = 0.6928 = 69.28%

sigmaa2 = (Ba x sigmam )2 + sigma2(ea) = Systematic component + Firm specific component

Systematic component = (Ba x sigmam)2 = (0.7 x 0.2)2 = 0.0196

Firm specific component = sigma2(ea) = sigmaa2 - (Ba x sigmam )2 = 0.31302 - 0.0196 = 0.0784

Similarly for Stock B

Systematic component = (Bb x sigmam)2 = (1.2 x 0.2)2 = 0.0576

Firm specific component = sigma2(eb) = sigmab2 - (Bb x sigmam )2 = 0.69282 - 0.0576 = 0.4224

Covariance = Product of betas x market index risk

Cov (Ra , Rb) = Ba x Bb x sigmam2 = 0.7 x 1.2 x 0.202 = 0.0336

As per CAPM, Return=Risk free rate+Market risk premium*beta

For $1 Discount store, return as per CAPM>forecasted return, it is overpriced.

For Everything $5, return as per CAPM<forecasted return, it is under priced.

1+r (0,12)(0,6) 0,072 7,2%

02 - 0.0196 = 0.0784

82 - 0.0576 = 0.4224

eturn), alpha values and residual variances for these stocks.

passive portfolio and active portfolio.)

w much of it is contributed by the active portfolio?

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Expected return of Stock A and B are _% and __%, respectively.