1 Holding Period Return The assets of Potential Corp grew fr

1. Holding Period Return The assets of Potential Corp. grew from 2.3 to 3.3 million dollars in just nine months. What return was earned over the nine month period? What was the monthly return assuming monthly compounding? What was the APR? What was the EAR?

2. Expected Value You can buy a lottery ticket for $1. The current jackpot is $10 million, and the odds of winning are 1 in 16 million. What is the expected dollar payout if you buy 1 ticket? What is your expected percentage return?

3. Portfolio Return and Variance Two securities, Ames, Inc., and Gilbert, Inc., are to be combined in a portfolio in equal proportions. Ames has an expected return of 8% and Gilbert has an expected return of 14%. Ames has a standard deviation of 10% and Gilbert has a standard deviation of 20%. Find the expected return and standard deviation of the portfolio when the correlation coefficient between the two securities is (a) 1, (b) 0, and (c) -1.

PLEASE SHOW ALL WORK AND FORMULAS

Solution

1. return for nine months = 3.3/2.3 - 1 = 43.48

APR = (3.3/2.3 - 1) *12/9 = 57.97%

EAR = (3.3/2.3)^12/9 - 1 = 61.83%

2. expected payout = 1/16 * 10 million = 0.625

expected % return = 0.625/1 - 1 = -37.50%

3. expected return = (8% + 14%)/2 = 11%

standard dev when correl is 1 = 0.5*10% + 0.5*20% = 15%

SD when correl is 0 = square root((0.5*0.1)^2 + (0.5*0.2)^2) = 11.18%

SD when correl is -1 = 0.5*20% - 0.5*10% = 5%