You have been given this probability distribution of the holding period return for KMP stock: State Probability
Question:
You have been given this probability distribution of the holding period return for KMP stock:
State Probability Return
1 40% 25%
2 30% 15%
3 30% -5%
What is the expected return and standard deviation for KMP stock?
4. You are constructing a portfolio with the following assets:
Stocks Bonds
Expected return () 13.5% 5.6%
Standard deviation () 18.4% 8.1%
Correlation coefficient () 0.13
1)You invest 72% of your wealth in stocks and 28% in bonds. Calculate the expected return and standard deviation of your portfolio.
2) Calculate standard deviations when the correlation coefficients are two extreme values, -1 and +1. Which case would you prefer?
5. Portfolio A has a beta of 1.3. The market risk premium, RM-Rf, is 5.2%, and the risk-free rate is 3.5%. What is the expected return of the portfolio based on CAPM?
6. Suppose that Bank A is offering the following deposit and mortgage rates to their customers:
Maturity Deposit rate Mortgage rate
1 year 4% 6%
5 years 2% 5%
1) What is Bank A's net interest income in Year 1?
2) What is Bank A's net interest income for Year 3 when the interest rates increase by 3% in Year 2?
7. 1) A pension fund must pay out $1.2 million next year, $2.8 million the following year, and then $4.5 million the year after that. If the discount rate is 7%, what is the duration of this set of payments? (Fill the table)
Time CF PV (CF) @ 7% wt t wt
1
2
3
2) What is the duration of a 12-year zero-coupon bond with a par value of $10,000? 3) A perpetuity pays $1,000 each and every year forever. What is the duration of this perpetuity if its yield is 9%?
3) Discuss Bank A's strategy to minimize or eliminate the risk shown in 2) if any.
8. 1) A coupon bond that pays interest of $50 annually has a par value of $1,000, matures in 5 years, and is selling today at an $62 discount from par value. What is the yield to maturity on this bond?
2) A coupon bond that pays interest semiannually has a par value of $1,000, matures in 6 years, and has a yield to maturity of 8%. If the coupon rate is 7%, what is the price of the bond today?
9. An investor has a 15-year maturity, 8% coupon, 8% yield bond with a duration of 12 years and a convexity of 125.5. If the interest rate were to fall 50 basis points, what is your predicted new price for the bond (including convexity)? The current price of the bond is $1,000.
10. Suppose you pay $9,650 for a $10,000 par Treasury bill maturing in 3 months. What is the effective annual rate of return for this investment?
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill