Question

Hello, I have question 4 and 5 answered, with the answers provided. I just need some help on question 6, thanks!

Q4.   On Friday, April 3, 2019 you bought the following portfolio for the prices in the table:                                                                                                   Prices            Prices           

                                                                        Beta                4,3,2019         4,3,2020

10,000 shares of IBM (IBM)                              b = 1.44           S = $80.79        S = $90.45

20,000 shares of CITIGP (C)                              b = 1.23           S = $37.23        S = $12.67

7,500   shares of BOING (BA)                            b = 1.61           S = $26.50        S = $31.25

15,000 shares of GENERAL MOTORS (GM)         b = 1.15           S = $34.90        S = $52.36

10,000 shares of TEXASINSTRUMENTS (TXN)    b = 1.67           S = $16.90        S = $4.21

Based on the prices on 4,3,2019 and on 4,3,2020, compute the one-year rate of return

on your portfolio in two ways:

1. Based on the total change in the portfolio’s value.

= [($2,219,775-$2,443,750)/($2,443,750)]*100

= -9.17%

2. Based on the one-year rate of return on the individual stocks.

IBM stock = [(90.45-80.79)/(80.79)]*100 = 11.96%

CITIGP stock = [(12.67-37.23)/(37.23)]*100 = -65.97%

BA stock = [(31.25-26.50)/(26.50)]*100 = 17.92%

GM stock = [(52.36-34.90)/(34.90)]*100 = 50.03%

TXN stock = [(4.21-16.90)/(16.90)]*100 = -75.09%

= (0.33*.1196)+(0.304*-.6597)+(0.081*.1792)+(0.214*.5003)+(0.069*-.7509)

= -9.17%

                                                                                         

Q5. Calculate the b of the portfolio in Q4.

= (0.33*1.44)+(0.304*1.23)+(0.081*1.61)+(0.214*1.15)+(0.069*1.67)

Beta = 1.34

Q6. The betas given in Q4. are based on the S&P500 Index. The

S&P500 index is expected to go down by 10%, calculate the expected change in

value of your portfolio based on your calculation in Q5.

your portfolio based on your calculation in Q5.

Answer 1

if S&P index goes down by 10% then the value of the asset will go down by (Beta * S&P Value reduction)

Expected Change in Value of Portfolio = Beta * S&P Index Value reduction

Expected Change in Value of Portfolio = 1.34 * -10%

Expected Change in Value of Portfolio = -13.40%

It means the value of portfolio will reduce by 13.40%

Expected Change in Value of portfolio = Beginning of Year Value * Value Lost

Expected Change in Value of portfolio = $2443750 * - 13.40%

Expected Change in Value of portfolio = $327462.50

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