Question 1

undefined

Consider the following risk-free T-bill and coupon bonds available for sale in the bond market (assume annual coupons):

undefined

undefined

Question 2

undefined

Tresla Corporation is experiencing rapid growth. Dividends are expected to double in each of the next two years, grow at 20% per year over three years after that, and then 5% percent per year indefinitely. The required return on this stock is 15%, and the stock currently sells for $730 per share.

undefined

• Tresla just paid the dividend. What was it?
• “Draw” the time line (a table) showing dividends paid by Tresla over the next 7 years.
• What would be the price of Tresla be if it did not grow and continued to pay the same dividends as it had just paid.
• What is the present value of Tresla’s growth opportunities (PVGO)?

undefined

Question 3

undefined

You want to invest in two stocks, Pfizer (PFE) and Moderna (MRNA). The table below presents the summary statistics for these two stocks:

undefined

undefined

The correlation coefficient between returns on these two stocks is 0.18.

undefined

• Construct a portfolio of these two stocks that is expected to pay 15% return.
• What is the standard deviation of your portfolio in part a?
• Now construct the new portfolio of PFE and MRNA that is expected to pay 25% return.
• Explain the weights of PFE and MRNA in your portfolio in part c.
• What is the standard deviation of the portfolio, which you constructed in part c?
• Compute the weights for the minimum variance efficient (MVE) portfolio, consisting of PFE and MRNA. You can use Solver to answer this question, but you need to explain in details, which problem your Solver actually solves. Alternatively, you can simply use calculus.
• What is the expected return and standard deviation of MVE portfolio?

undefined

• Write down your objective function with numbers plugged in.
• What are you doing with this function?
• What variable(s) can you choose?
• Do you have any constraints? Write them down.