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Financial Models Homework Solutions

The document is a homework assignment for FNCE 5710, focusing on financial models and investment scenarios. It includes multiple-choice questions related to holding-period returns, risk assessment between investors and gamblers, expected profits from risky portfolios, and calculations involving standard deviation and utility functions. The assignment tests knowledge on portfolio management and investment strategies.

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8 views3 pages

Financial Models Homework Solutions

The document is a homework assignment for FNCE 5710, focusing on financial models and investment scenarios. It includes multiple-choice questions related to holding-period returns, risk assessment between investors and gamblers, expected profits from risky portfolios, and calculations involving standard deviation and utility functions. The assignment tests knowledge on portfolio management and investment strategies.

Uploaded by

fang.jiao950702
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

FNCE 5710 – Intro to Financial Models

Homework #5
1. The holding-period return on a stock was 32%. Its beginning price was $25, and its cash
dividend was $1.50. Its ending price must have been __________. (1 points)
a. $28.50
b. $33.20
c. $31.50
d. $29.75

2. Both investors and gamblers take on risk. The difference between an investor and a
gambler is that an investor __________. (1 points)
a. is normally risk neutral
b. requires a risk premium to take on the risk
c. knows he or she will not lose money
d. knows the outcomes at the beginning of the holding period

3. Consider the following two investment alternatives: First, a risky portfolio that pays a
20% rate of return with a probability of 60% or a 5% rate of return with a probability of
40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio,
your expected profit after one year would be __________. (1 points)
a. $3,000
b. $7,000
c. $7,500
d. $10,000

4. You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky
asset with an expected rate of return of 16% and a standard deviation of 20% and a
Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed
with the risky asset and the risk-free asset is approximately __________. (1 points)
a. 1.04
b. 0.80
c. 0.50
d. 0.25

5. Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore,
(1 points)
a. for the same risk, David requires a higher rate of return than Elias.
b. for the same return, Elias tolerates higher risk than David.
c. for the same risk, Elias requires a lower rate of return than David.
d. for the same return, David tolerates higher risk than Elias.
6. Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of
earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard
deviation of this investment? (1 points)

7. A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The
A 2
risk-free rate is 6%. An investor has the following utility function: U =E(r )− σ .
2
Which value of A makes this investor indifferent between the risky portfolio and the risk-
free asset? (2 points)
8. You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate,
is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you
should __________.(2 points)

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