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(Solved) Homework Assignment 1 BUS 315: Investments (Spring 2017) Total Marks: 60 Percentage of Final Grade:5% Instructions: No outside resources needed.


Especially Question 1, i am not familiar with these type of question, please help me to finish all the questions. Thank you 

Homework Assignment 1 BUS 315: Investments (Spring 2017) Total Marks: 60 Percentage of Final Grade: 7.5% Instructions: To complete this assignment, you will need to read Chapters 4 to 8 from the textbook recommended for the course titled “Bodie, Kane, Marcus, Perrakis and Ryan, Investments, 8th Canadian Edition”. No outside resources needed. If you copy from any online websites, any other solution manuals, test banks, or past students, it will be considered plagiarism and you will receive zero points. Then your assignment will be sent to university disciplinary committee for further action. I have sent couple students last term and they were suspended for two terms. See the guide here: https://www.sfu.ca/students/academicintegrity/resources/academichonestyguide.html Each qualitative question (Except Question No. 1) should take maximum 1 page for the assignment. Write your name and ID at the top right hand corner of each page. The assignment has to be completely HANDWRITTEN. Markers will look at your correctness, clarity, neatness, and handwriting while grading. The assignment is due by 3pm, Wednesday, February 22nd, 2017. Drop the assignment in the assignment dropbox at the 3rd floor of Beedie. Please ask the front desk or the TAs if you cannot find it. No email submission will be accepted. Late submissions will receive zero points no matter what’s the reason. So, do not keep it for the last minute. Show all the steps in details to get full marks. Merely stating correct answers without calculation will not give you any point. Quantitative answers have to correct up to 2 decimal places. 1 Question 1: (10 marks) You have two stocks A and B, and their returns along with S&P/TSX return for the last 3 years Year Returns of Returns of Returns of A B S&P/TSX 1 7.0% -4.0% 9.0% 2 12.0% -6.5% -1.0% 3 6.5% 8.0% 11.0% a) Calculate the “covariance” and “correlation” between assets A and B. For this, use average (mean) return for the stocks. (4 marks) b) If you are willing to invest 60% of your money on A and rest on B, calculate your “expected return” and “risk” of the portfolio. (3 marks) c) Calculate the “betas” of stock A and B. (4 marks) Question 2: (5 marks) What is a fair game? Explain how the term relates to a risk-averse investor's attitude toward speculation and risk and how the utility function reflects this attitude. Question 3: (5 marks) Toby and Hannah are two risk-averse investors. Toby is more risk-averse than Hannah. Draw one indifference curve for Toby and one indifference curve for Hannah on the same graph. Show how these curves illustrate their relative levels of risk aversion. Question 4: (5 marks) Draw a graph of a typical efficient frontier. Explain why the efficient frontier is shaped the way it is. 2 Question 5: (5 marks) Discuss the differences between the “capital market line (CML)” and the “security market line (SML)”. Question 6: (5 marks) Discuss the mutual fund theorem. Question 7: (5 marks) List and discuss two of the assumptions of the CAPM. Question 8: (5 marks) Discuss the similarities and the differences between the CAPM and the single-factor model. Question 9: (5 marks) Discuss the advantages of “arbitrage pricing theory (APT)” over the “capital asset pricing model (CAPM)” relative to diversified portfolios. Question 10: (5 marks) Discuss the advantages of the multifactor APT over the single factor APT and the CAPM. What is one shortcoming of the multifactor APT and how does this shortcoming compare to CAPM implications? Question 11: (5 marks) Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75 and an expected return of 11%. The risk-free rate is 6%. Explain the arbitrage opportunity that exists; explain how an investor can take advantage of it. Give specific details about how to form the portfolio, what to buy and what to sell. 3

 


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