FM213 Problem Sets
PS3:
What is ex div price/share?
Calculate quarterly cash flows and don’t include Q1 cash flow
3. Filling in table, work out EPS first by multiplying ROE by book equity
c. Calculate value of companys stock – work out PV of CF
PS4:
2. Use modified duration to estimate new price of bond –
Work out PV of CF which equals price of bond,
then work out proportion of each yearly CF with total CF and use MD formula
3. Calculate 6 year spot rate –
Find portfolio that has non zero cf 6 years from now but 0 from y1-5,
do this through buying/selling each bond and equalise in Y1,
use CF in year 6 = cost of building pf/(1+r^6) to find spot rate
PS5:
What is the standard deviation of a portfolio that is split evenly between Dell and Home Depot and is
financed at 50 percent margin
1 Dell + 1 Home Depot minus 1 RF asset (shorting, borrowing so negative)
PS6:
What alt investment has lowest volatility whilst having same expected return as Microsoft?
E(ReturnMc) = combination of other asset + rf asset which involves shorting = 0.1x1 + 0.05x2
What investment has highest expected return while having same volatility as Microsoft?
Highest return = no inv in risk free asset
Variance portfolio = X^2 Variance of Microsoft
Sharpe ratio market = (E(RM) – Rf)/std m
PS8:
CIP Formula: x = foreign y = home, (1+ix) = Fx/y x (1+iy)/Sx/y
Fx/y – for every £y you get $x
b. estimated Forward price is 1.596, how could one make arbitrage profits if forward price = 1.65
F is overpriced so lend in the UK as you will get a higher return or borrow in the US
Construct table with headings: action at t = 0, cost, payoff at t = 1
PS3:
What is ex div price/share?
Calculate quarterly cash flows and don’t include Q1 cash flow
3. Filling in table, work out EPS first by multiplying ROE by book equity
c. Calculate value of companys stock – work out PV of CF
PS4:
2. Use modified duration to estimate new price of bond –
Work out PV of CF which equals price of bond,
then work out proportion of each yearly CF with total CF and use MD formula
3. Calculate 6 year spot rate –
Find portfolio that has non zero cf 6 years from now but 0 from y1-5,
do this through buying/selling each bond and equalise in Y1,
use CF in year 6 = cost of building pf/(1+r^6) to find spot rate
PS5:
What is the standard deviation of a portfolio that is split evenly between Dell and Home Depot and is
financed at 50 percent margin
1 Dell + 1 Home Depot minus 1 RF asset (shorting, borrowing so negative)
PS6:
What alt investment has lowest volatility whilst having same expected return as Microsoft?
E(ReturnMc) = combination of other asset + rf asset which involves shorting = 0.1x1 + 0.05x2
What investment has highest expected return while having same volatility as Microsoft?
Highest return = no inv in risk free asset
Variance portfolio = X^2 Variance of Microsoft
Sharpe ratio market = (E(RM) – Rf)/std m
PS8:
CIP Formula: x = foreign y = home, (1+ix) = Fx/y x (1+iy)/Sx/y
Fx/y – for every £y you get $x
b. estimated Forward price is 1.596, how could one make arbitrage profits if forward price = 1.65
F is overpriced so lend in the UK as you will get a higher return or borrow in the US
Construct table with headings: action at t = 0, cost, payoff at t = 1
