Question

	Small Stocks	S&P 500	Corporate Bonds	T-Bills
Average Return	19.73%	12.31%	6.36%	3.98%
Standard Deviation of returns	38.67%	19.52%	6.75%	4.88%

1. Calculate the 95% prediction intervals for the four different investments included in the following table.

The 95% prediction interval of small stocks is between __% and __%. (Round to two decimal places and put the lower number first.)

The 95% prediction interval of the S&P500 is between __% and __%. (Round to two decimal places and put the lower number first.)

The 95% prediction interval of corporate bonds is between __% and __%. (Round to two decimal places and put the lower number first.)

The 95% prediction interval of T-bills is between __% and __%. (Round to two decimal places and put the lower number first.)

2. You buy 110 shares of Tidepool Co. for $44 each and 215 shares of Madfish, Inc., for $15 each. What are the weights in your portfolio?

a. The weight of Tidepool Co. stock in the portfolio is __%. (Round to one decimal place.)

b. The weight of Madfish Inc. stock in the portfolio is __%. (Round to one decimal place.)

3. Fremont Enterprises has an expected return of 12% and Laurelhurst News has an expected return of 20%. If you put 66% of your portfolio in Laurelhurst and 34% in Fremont, what is the expected return of your portfolio?

The expected on the portfolio is __%. (Rounded to two decimal places.)

Answer 1

1) For 95% confidence, range is mean + / - 1.96 x S.D.

For Small Stocks, Range = 19.73% +/- 1.96 x SD = -56.06% to 95.52%

For S&P500, Range = 12.31% +/- 1.96 x 19.52% = -25.95% to 50.57%

For Corporate bonds, Range = 6.36% + / - 1.96 x 6.75% = -6.87% to 19.59%

For T-bills, Range = 3.98% + / - 1.96 x 4.88% = -5.58% to 13.54%

2) Value of Tidepool = 110 x 44 = 4,840, Value of Madfish = 15 x 215 = 3,225, Total = 8,065

Weight of Tidepool = 4,840 / 8,065 = 60.0% and Weight of Madfish = 40.0%

3) E(R) = 12% x 34% + 20% x 66% = 17.28%