Department of Finance Olin Business School Washington University in St Louis Spring 2022 FIN 441 Investments Textbook Assignment 4 Due Feb 23rd 2022 1 Bodie Kane Marcus 2021 Chapter 5 CFA Problems 2 Based on the Scenarios below what is the expected return for a portfolio with the following return profile Probability Rate of return Normal Market Bull Market 0 3 10 Bear Market 0 2 25 0 5 24 2 Bodie Kane Marcus 2021 Chapter 5 CFA Problems 3 4 Use the following scenario analysis for Stocks X and Y to answer CFA the following questions round to the nearest percent Probability Stock X Stock Y Normal Market Bull Market 0 5 18 20 Bear Market 0 2 20 15 0 3 50 10 a What are the expected rates of return for Stocks X and Y b What are the standard deviations of returns on Stocks X and Y 3 Bodie Kane Marcus 2021 Chapter 6 Problem 5 Consider a portfolio that offers an expected rate of return of 12 and a standard deviation of 18 T bills offer a risk free 7 rate of return What is the maximum level of risk aversion for which the risky portfolio is still preferred to T bills 4 Bodie Kane Marcus 2021 Chapter 6 Problem 19 You manage a risky portfolio with an expected rate of return of 18 and a standard deviation of 28 The T bill rate is 8 Your client s degree of risk aversion is A 3 5 a What proportion y of the total investment should be invested in your fund b What are the expected value and standard deviation of the rate of return on your client s optimized portfolio 5 Bodie Kane Marcus 2021 Chapter 6 Problem 21 Consider the following information about a risky portfolio that you manage and a risk free asset E rP 11 P 15 rf 5 a Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 8 What proportion should she invest in the risky portfolio P and what proportion in the risk free asset b What will be the standard deviation of the rate of return on her portfolio c Another client wants the highest return possible subject to the constraint that you limit his standard deviation to be no more than 12 Which client is more risk averse