Bus 405 week 4 dq2 portfolio weights

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This document of BUS 405 Week 4 Discussion Question 2
Portfolio Weights comprises:
Complete Problem 10 from the Questions and Problems
section of Chapter 12: A stock has a beta of .9 and an
expected return of 9 percent. A risk-free asset currently
earns 4 percent.
a. What is the expected return on a portfolio that is equally
invested in the two assets? 6.50% (See calculations below).
b. If a portfolio of the two assets has a beta of .5, what are
the portfolio weights?
c. If a portfolio of the two assets has an expected return of 8
percent, what is its beta? 0.72 (See computations
underneath).
d. If a portfolio of the two assets has a beta of 1.80, what are
the portfolio weights? How do you interpret the weights for
the two assets in this case? 2 and -1 (See computations
underneath).
Business - General Business
Week One
Week 1 – DQ1 - Blume’s Formula, Allocation, and Selection
From Chapter 1, answer Concept Question 5: What is Blume’s
formula? When would you want to use it in practice? Also,
from Chapter 2, answer Concept Question 4: What is the
difference between asset allocation and security selection?

2. Remember to complete all parts of the questions and
support your answers with examples from the text and other
resources.
Week 1 – DQ2 - Money Market Funds
From Chapter 4, complete Problem 4: The Aqua Liquid Assets
Money Market Mutual Fund has a NAV of $1 per share.
During the year, the assets held by this fund appreciated by
2.5 percent. If you had invested $50,000 in this fund at the
start of the year, how many shares would you own at the end
of the year? What will the NAV of this fund be at the end of
the year? Why? Remember to complete all parts of the
question, show your work, and report the results of your
analysis.
Assignment
Week 1- Assignment - Annualized Returns – Chapter 3
problem 18
Complete problem 18 in Chapter 3 (shown below) and submit
to the instructor. Show your work to find the annualized
return for each of the listed share prices. Write a 100 word
analysis of the process to calculate these annualized returns.
Suppose you have $28,000 to invest. You’re considering
Miller-Moore Equine Enterprises (MMEE), which is currently
selling for $40 per share. You also notice that a call option
with a $40 strike price and six months to maturity is
available. The premium is $4.00. MMEE pays no dividends.
What is your annualized return from these two investments
if, in six months, MMEE is selling for $48 per share? What
about $36 per share?
Week Two
Readings

3. Chapter 5: The Stock Market
Chapter 6: Common Stock Valuation
Chapter 7: Stock Price Behavior and Market Efficiency
Chapter 8: Behavioral Finance and the Psychology of
Investing
Discussions
Week 2 – DQ1 - Primary and Secondary Markets
Complete Concept Question 1 from Chapter 5: If you were to
visit your local Chevrolet retailer, there is both a primary and
a secondary market in action. Explain. Is the Chevy retailer a
dealer or a broker? Remember to complete all parts of the
question and support your answers with examples from the
text and other resources.
Week 2 – DQ2 - Contrarian Investing
Complete Concept Question 9 from Chapter 8: What does it
mean to be a contrarian investor? How would a contrarian
investor use technical analysis? Post your answers to the
discussion board. Remember to complete all parts of the
question and support your answers with examples from the
text and other resources.
Assignment
Week 2 – Assignment - Abbott Laboratories Problem
After reading the Value Line figures and information on
Abbott Laboratories in the Questions and Problems section
of Chapter 6 (just before Problem 27), complete Problems 27,
28, 29, 30, and 31 and submit to your instructor. Show your
calculations and in your response to problem 31 write a 100
to 200 word defense of your position as to the value of
Abbott Laboratories stock at its current price of $50 per

4. share.
27. What is the sustainable growth rate and required return
for Abbott Laboratories? Using these values, calculate the
2010 share price of Abbott Laboratories Industries stock
according to the constant dividend growth model.
28. Using the P/E, P/CF, and P/S ratios, estimate the 2010
share price for Abbott Laboratories. Use the average stock
price each year to calculate the price ratios.
29. Assume the sustainable growth rate and required return
you calculated in Problem 27 are valid. Use the clean surplus
relationship to calculate the share price for Abbott
Laboratories with the residual income model.
30. Use the information from the previous problem and
calculate the stock price with the clean surplus dividend. Do
you get the same stock price as in the previous problem?
Why or why not?
31. Given your answers in the previous questions, do you feel
Abbott Laboratories is overvalued or undervalued at its
current price of around $50? At what price do you feel the
stock should sell?
Week Three
Discussions
Week 3 – DQ1 - Forward Interest Rates
Complete Problem 16 from the Questions and Problems
section of Chapter 9: According to the pure expectations
theory of interest rates, how much do you expect to pay for a
one-year STRIPS on February 15, 2011? What is the
corresponding implied forward rate? How does your answer
compare to the current yield on a one-year STRIPS? What
does this tell you about the relationship between implied

5. forward rates, the shape of the zero coupon yield curve, and
market expectations about future spot interest rates?
Remember to complete all parts of the questions, and report
the results of your analysis.
Week 3 – DQ2 - Bond Prices versus Yields
Complete Concept Question 9 of Chapter 10: (a) What is the
relationship between the price of a bond and its YTM? (b)
Explain why some bonds sell at a premium to par value, and
other bonds sell at a discount. What do you know about the
relationship between the coupon rate and the YTM for
premium bonds? What about discount bonds? For bonds
selling at par value? (c) What is the relationship between the
current yield and YTM for premium bonds? For discount
bonds? For bonds selling at par value? Remember to
complete all parts of the questions, and report the results of
your analysis.
Assignment
Week 3 – Assignment – Bootstrapping Chapter 10 Problem
31
Complete problem 31 of Chapter 10 (shown below), and
submit to your instructor. Show your calculations and the
algebraic manipulation of the price equation for the bond. In
addition to solving the problem, write a 100 to 200 word
essay on the term structure of fixed income securities.
One method used to obtain an estimate of the term structure
of interest rates is called bootstrapping. Suppose you have a
one-year zero coupon bond with a rate of r1 and a two-year
bond with an annual coupon payment of C. To bootstrap the
two-year rate, you can set up the following equation for the
price (P) of the...

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