Questions

1) Consider an investment whose expected return is 18 percent and standard deviation is 15 percent. Compute the 1% VaR. Interpret your results!

2)You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with 2 risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081. If you want to form a portfolio with an expected rate of return of 0.10, what percentages of your money must you invest in the T-bill, X, and Y, respectively if you keep X and Y in the same proportions to each other as in portfolio P?

3) Suppose your expectations regarding the stock market are as follows:

State of the Economy                     Probability          HPR

Boom                                                   0.40                 45%
Normal Growth                                    0.35                 18

Recession                                            0.25                 -12

4) You sold short 300 shares of common stock at $60 per share. The initial margin is 50% . At what stock price would you receive a margin call if the maintenance margin is 38%

5) Consider two risky securities, K and L. K has an expected rate of return of 15% and a standard deviation of 23%. L has an expected rate of return of 12% and a standard deviation of 14% correlation between the returns K and the returns of L is .35, what is the expected return standard deviation of a portfolio invested 60 percent in K and 40 percent in L?