3. Can Financial Engineering Cure Cancer?Before you do this question, you may want to watch the following video first:https://www.youtube.com/watch?feature=player_embedded&v=xu86bYKVmREConsider a hypothetical drug-development program requiring $200 million in out-ofpocketcosts over a 10-year period during which no revenues are generated, and withonly a 5% probability of success. However, if the drug development is successful, itis plausible to assume that it could generate a net income of $2 billion per year overa 10-year period of exclusivity from years 11?20. The present value of this incomestream in year 10 is $12.3 billion (using a 10% cost of capital).(a) Compute the expected return and standard deviation (over a 10-year period) ofthis investment.(b) Suppose we setup a megafund to fund 150 drug-development programs, with thesame amounts of investment and payoff as the one in part (a). Assuming that the successor failure of each program is independent of each other, what is the probability forthe megafund to score three or more successes in the 150 drug-development programs.(c) Compute the expected return and standard deviation (over a 10-year period) of themegafund.4. hw3.xlsx contains the monthly return data for Microsoft (MSFT), IBM (IBM), Apple(AAPL) and Hewlett-Packard (HPQ) for the period 2004/1?2013/12.(a) Report the average return and sample covariance matrix of the four stocks basedon the monthly data.(b) Using the estimates from part (a) as the expected returns and covariance matrixfor the four stocks, find out the global minimum variance portfolio of the four stocksassuming (i) short-selling is allowed, and (ii) short-selling is not allowed.(c) Using the estimates from part (a) as the expected return and covariance matrix forthe four stocks, find out the tangency portfolio of the four stocks assuming (i) shortsellingis allowed, and (ii) short-selling is not allowed. Assume a monthly risk-free rateof 0.1%/month.Note: To do optimization in Excel, you may want to use ?Tool

Month 20040130 20040227 20040331 20040430 20040528 20040630 20040730 20040831 20040930 20041029 20041130 20041231 20050131 20050228 20050331 20050429 20050531 20050630 20050729 20050831 20050930 20051031 20051130 20051230 20060131 20060228 20060331 20060428 20060531 20060630 20060731 20060831 20060929 20061031 20061130 20061229 20070131 20070228 20070330 20070430 20070531 20070629 20070731 20070831 20070928 20071031 20071130 20071231 20080131 20080229 20080331 20080430 20080530 20080630 20080731 20080829 20080930 20081031 20081128 20081231 20090130 20090227 20090331 20090430 20090529 20090630 20090731 20090831 20090930 20091030 20091130 20091231 20100129 20100226 20100331 20100430 20100528 20100630 20100730 20100831 20100930 20101029 20101130 20101231 20110131 20110228 20110331 20110429 20110531 20110630 20110729 20110831 20110930 MSFT 0.010230 -0.040506 -0.060309 0.048135 0.003827 0.088830 -0.002451 -0.038961 0.012821 0.011573 0.068645 -0.003357 -0.016467 -0.039574 -0.039348 0.046752 0.022925 -0.037209 0.030998 0.072237 -0.060263 -0.001166 0.080156 -0.055275 0.076482 -0.042273 0.012653 -0.112459 -0.058385 0.028698 0.032618 0.071904 0.064202 0.049726 0.026123 0.017030 0.033490 -0.083927 -0.010650 0.074273 0.028393 -0.039756 -0.016288 -0.005519 0.025409 0.249491 -0.084216 0.059524 -0.084270 -0.162273 0.043386 0.004933 -0.003156 -0.028602 -0.065067 0.065319 -0.021986 -0.163357 -0.088670 -0.038576 -0.120370 -0.047953 0.137461 0.102885 0.037512 0.137865 -0.010517 0.053571 0.043408 0.078149 0.065272 0.036382 -0.075459 0.022001 0.021538 0.042595 -0.150811 -0.108140 0.121686 -0.085819 0.043682 0.088812 -0.046784 0.105018 -0.006628 -0.035528 -0.044771 0.020874 -0.028935 0.039584 0.053846 -0.023358 -0.064286 IBM 0.070673 -0.025899 -0.048290 -0.039961 0.006805 -0.004967 -0.012252 -0.025267 0.012398 0.046769 0.052033 0.046053 -0.052343 -0.007065 -0.012962 -0.164150 -0.008248 -0.017869 0.124798 -0.031632 -0.004962 0.020693 0.088178 -0.075366 -0.010949 -0.010578 0.027792 -0.001576 -0.025990 -0.038548 0.007680 0.049864 0.011980 0.126800 -0.001191 0.056897 0.020587 -0.059607 0.014203 0.084341 0.046864 -0.012664 0.051306 0.058202 0.009512 -0.014261 -0.090768 0.027762 -0.009158 0.066754 0.011242 0.048289 0.076471 -0.084215 0.079727 -0.044929 -0.039185 -0.205113 -0.116919 0.031373 0.088997 0.009602 0.052809 0.065229 0.035074 -0.017501 0.129381 0.005681 0.013215 0.008361 0.052152 0.036011 -0.065011 0.043468 0.008572 0.005848 -0.023953 -0.014210 0.039844 -0.035981 0.089418 0.070523 -0.010376 0.037466 0.103843 0.003272 0.007351 0.046054 -0.005276 0.015509 0.060041 -0.050536 0.017218 AAPL 0.055685 0.060284 0.130435 -0.046598 0.088441 0.159658 -0.006146 0.066481 0.123514 0.352258 0.279580 -0.039523 0.194099 0.166710 -0.071110 -0.134629 0.102587 -0.074179 0.158653 0.099414 0.143314 0.074240 0.177635 0.060012 0.050355 -0.092968 -0.084246 0.122290 -0.150874 -0.041827 0.186660 -0.001619 0.134562 0.053261 0.130488 -0.074405 0.010490 -0.013064 0.098097 0.074158 0.214339 0.007005 0.079646 0.051002 0.108247 0.237701 -0.040695 0.087038 -0.316640 -0.076389 0.147816 0.212195 0.085082 -0.112901 -0.050705 0.066562 -0.329558 -0.053405 -0.138675 -0.078990 0.056005 -0.009098 0.177024 0.197013 0.079313 0.048745 0.147160 0.029500 0.101896 0.016995 0.060531 0.054134 -0.088591 0.065380 0.148470 0.111021 -0.016125 -0.020827 0.022741 -0.055005 0.167215 0.060723 0.033790 0.036670 0.051959 0.040935 -0.013314 0.004656 -0.006569 -0.034960 0.163285 -0.014469 -0.009121 HPQ 0.035699 -0.045397 0.009247 -0.137478 0.078173 -0.002825 -0.045024 -0.112159 0.052543 -0.004800 0.071811 0.052500 -0.065808 0.061766 0.058654 -0.067001 0.099658 0.047979 0.047214 0.127539 0.054755 -0.039726 0.058131 -0.032356 0.089067 0.052277 0.005181 -0.013070 -0.002772 -0.019148 0.007260 0.145722 0.005744 0.055874 0.018585 0.045869 0.050740 -0.090804 0.022109 0.049826 0.084718 -0.022096 0.031600 0.072127 0.010537 0.037959 -0.010062 -0.011728 -0.133914 0.092635 -0.042495 0.015112 0.015318 -0.058861 0.013345 0.047321 -0.012788 -0.172145 -0.078370 0.030896 -0.042436 -0.164604 0.107131 0.122271 -0.045303 0.127511 0.120310 0.036721 0.053464 0.005295 0.033713 0.051569 -0.086197 0.079031 0.048041 -0.022201 -0.114682 -0.057596 0.063771 -0.164857 0.096229 -0.000713 -0.002617 0.005962 0.085273 -0.045086 -0.059134 -0.014645 -0.074065 -0.023007 -0.033791 -0.259881 -0.132924 20111031 20111130 20111230 20120131 20120229 20120330 20120430 20120531 20120629 20120731 20120831 20120928 20121031 20121130 20121231 20130131 20130228 20130328 20130430 20130531 20130628 20130731 20130830 20130930 20131031 20131129 20131231 0.069908 -0.031919 0.014855 0.137519 0.081612 0.016226 -0.007441 -0.081993 0.047962 -0.036613 0.052596 -0.034393 -0.040995 -0.059390 0.003558 0.027717 0.021129 0.028957 0.157140 0.061329 -0.010172 -0.078304 0.056219 -0.003593 0.063852 0.084875 -0.018883 0.055813 0.022315 -0.021915 0.047422 0.025337 0.060591 -0.007525 -0.064371 0.013893 0.002045 -0.001429 0.064665 -0.062280 -0.018558 0.007787 0.060141 -0.006845 0.062092 -0.050445 0.031747 -0.081290 0.020564 -0.060603 0.015965 -0.032239 0.007924 0.043911 0.061523 -0.055783 0.059655 0.127111 0.188311 0.105284 -0.025969 -0.010702 0.010853 0.045822 0.093539 0.002803 -0.107607 -0.012413 -0.090738 -0.144094 -0.025116 0.002855 0.000271 0.022596 -0.118303 0.141225 0.083389 -0.021481 0.096386 0.069673 0.008902 0.185301 0.050357 -0.074061 0.086180 -0.095425 -0.053734 0.039026 -0.084006 -0.107496 -0.092989 -0.074561 0.018483 -0.188159 -0.062094 0.107159 0.158597 0.219867 0.190268 -0.135906 0.185437 0.021507 0.035484 -0.130062 -0.053930 0.161029 0.122281 0.028344