Question

PLEASE SHOW WORK

A.What is the standard deviation of a portfolio consisting of 70 percent GM and 30 percent Symtex? 29.49%

Company	Beta	E(R)	Variance	Covariance
AMEX	1.3	0.13	0.101	COVA,G = 0.030
GM	1.0	0.12	0.149	COVA,S = 0.043
Symtex	0.8	0.11	0.048	COVG,S = 0.023

B.EGH Corporation currently pays a $2.00 per share dividend. Earnings and dividends are expected to grow at a rate of 20 percent annually over the next three years, then slow to a 3 percent rate thereafter. What is the value of this stock if investors require a 12 percent return?$35.06

Answer 1

The portfolio standard deviation consisting of GM and Syntex is :

Standard deviation = Root over of [ (W1)^2 * Variance of GM + (W2)^2 * Variance of Syntax + 2 * W1*W2 *Covariance of GM and SYntex

Here, w1 (GM) = 70%

w2 ( Syntax ) = 30%

SD = root over [( 0.7)^2 * 0.149 + (0.3)^2 *0.048 + 2* 0.7*0.3 *0.023]

= root over of [ 0.073 + 0.0043 + 0.0097]

=29.49% or 29.5% (rounded off to two decimal places)

The value of stock today is :

D0 = $2,

D1 = $2.4

D2 = $2.88

D3= $3.456

D4 = D3/ Re - g

= 3.456*1.03/ 0.12 -0.09

= $39.5520

The value of the stock today is:

2.4/1.12 + 2.88/1.12^2 + $3.456/1.12^3 + $39.5520/1.12^3

= $2.1429 + $2.2959 + $2.4599 + $28.1523

=$35.05