1. Suppose the CAPM holds. The expected return on the market portfolio is 6% and RF = 4%. Assume continuous compounding. A company will sell 1 unit of gold a year from today. Assume that the mean price of gold next year is $100, and the standard deviation is $20. Assume that the market 3 of gold is 0.9. (a) Find the value of the firm if it did no hedging. (b) If the firm went short $3 times the value of the firm in (a) of the market portfolio, and invested the proceeds in riskless debt, then what would be the hedged firm's beta? What would be its expected return, and what would be the market value of the firm? (c) Find the price of a 1-year forward contract on a unit of gold. Find the value of the firm if it hedged its gold price risk in the forward market. 2. Suppose the market portfolio consists of weights wi = 0.30 and w20.70 in two stocks. Assume that E[R₁] = 0.1, E[R₂] = 0.2, var[R₁] = 0.25, and var[R₂] = 0.45. Assume that the correlation between the two stock returns is 0.5. (a) Compute the variance of the market portfolio. (b) Find the beta of each stock with respect to the market portfolio. (c) Compute the value of w₁ B1+w₂ B₂. .

1. Suppose the CAPM holds. The expected return on the market portfolio is 6% and RF = 4%. Assume continuous compounding. A company will sell 1 unit of gold a year from today. Assume that the mean price of gold next year is $100, and the standard deviation is $20. Assume that the market 3 of gold is 0.9. (a) Find the value of the firm if it did no hedging. (b) If the firm went short $3 times the value of the firm in (a) of the market portfolio, and invested the proceeds in riskless debt, then what would be the hedged firm's beta? What would be its expected return, and what would be the market value of the firm? (c) Find the price of a 1-year forward contract on a unit of gold. Find the value of the firm if it hedged its gold price risk in the forward market. 2. Suppose the market portfolio consists of weights wi = 0.30 and w20.70 in two stocks. Assume that E[R₁] = 0.1, E[R₂] = 0.2, var[R₁] = 0.25, and var[R₂] = 0.45. Assume that the correlation between the two stock returns is 0.5. (a) Compute the variance of the market portfolio. (b) Find the beta of each stock with respect to the market portfolio. (c) Compute the value of w₁ B1+w₂ B₂. .

Name: please explain, thanks 1. Suppose the CAPM holds. The expected return
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Description: please explain, thanks 1. Suppose the CAPM holds. The expected return on the market portfolio is 6% and RF = 4%. Assumecontinuous compounding. A company will sell 1 unit of gold a year from today. Assume that the meanprice of gold next year is $100,

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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