1. Portfolio return. At the beginning of 2018, you invested $20,000 in Magee's Wonder Corporation (MWC),...

 

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1. Portfolio return. At the beginning of 2018, you invested $20,000 in Magee's Wonder Corporation (MWC), trading at $20 per share. MWC earned a return of 14% in 2018, 20% in 2019, -8% in 2020. Assume the risk-free rate is 3% per year. You can treat this risk-free asset as an asset with a constant rate of return. What was the cumulative return from the start of 2018 to the end of 2020 if you had formed the following portfolios: (a) Buy 500 shares of MWC, invest the remainder in the risk-free asset. Answer: (b) Buy 2,000 shares of MWC on margin, borrowing at the risk-free rate. (Hint: When you borrow from the risk-free asset, its weight in your portfolio should be negative.) (c) Short-sell 1,000 shares of MWC, invest the remainder in the risk free asset. 2. Semi-annual coupon bond. Suppose there is an 8% coupon, 5-yr. bond that pays coupons semi-annually. The discount rate is 10% and is the same for all coupons and the face value. (a) What is the annual coupon payment? What is each coupon payment C? (b) To calculate the price, use the semi-annual discount rate y = 10%/2 = 5%, and there are T= 10 half- year periods. What is the price of this bond? 1. Portfolio return. At the beginning of 2018, you invested $20,000 in Magee's Wonder Corporation (MWC), trading at $20 per share. MWC earned a return of 14% in 2018, 20% in 2019, -8% in 2020. Assume the risk-free rate is 3% per year. You can treat this risk-free asset as an asset with a constant rate of return. What was the cumulative return from the start of 2018 to the end of 2020 if you had formed the following portfolios: (a) Buy 500 shares of MWC, invest the remainder in the risk-free asset. Answer: (b) Buy 2,000 shares of MWC on margin, borrowing at the risk-free rate. (Hint: When you borrow from the risk-free asset, its weight in your portfolio should be negative.) (c) Short-sell 1,000 shares of MWC, invest the remainder in the risk free asset. 2. Semi-annual coupon bond. Suppose there is an 8% coupon, 5-yr. bond that pays coupons semi-annually. The discount rate is 10% and is the same for all coupons and the face value. (a) What is the annual coupon payment? What is each coupon payment C? (b) To calculate the price, use the semi-annual discount rate y = 10%/2 = 5%, and there are T= 10 half- year periods. What is the price of this bond?

Answer rating: 100% (QA)

Calculation of return per share Year Price per share Return per share Retur... View the full answer