What is the price of a forward contract

Question

Question 1: Suppose the expected return on the market portfolio is 13.8 percent and the risk-free rate is 6.4 percent. Solomon Inc . stock has a beta of 1.2. Assume the capital-asset-pricing model holds.

a) What Is the expected return on Solomon's stock?

b) If the risk-free rate decreases to 3.5 percent, what is the expected return on Solomon's stock?

Question 2: Suppose you have Invested $30,000 in the following four stocks:

Security    Amount Invested    Beta

Stock A            $ 5,000           0.75
Stock 8             10,000            1.1
Stock C              8.000           1.36
Stock D              7,000           1.88

The risk-free rate Is 4 percent and the expected return on the market portfolio is 15 percent. Based on the capital-asset-pricing model, what is the expected return on the above portfolio?

Question 3: Suppose the expected returns and standard deviations of stocks A and B are E(R_A) = 0. I5, E(R_B) = 0.25, σ_A = 0.1. and as σ_B = 0.2, respectively.

a. Calculate the expected return and standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation between the returns on A and B is 0.5.

b. Calculate the standard deviation of a portfolio that Is composed of 40 percent A and 60 percent B when the correlation coefficient between the returns on A and B is —0.5.

c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio?

Question 4: A portfolio that combines the risk-free asset and the market portfolio has an expected return of 25 percent and a standard deviation of 4 percent. The risk-free rate is 5 percent. and the expected return on the market portfolio is 20 percent.Assume the capital-asset-pricing model holds.What expected rate of return would a security earn if It had a 0.5 correlation with the market portfolio and a standard deviation of 2 percent?

Question 5: You enter into a forward contract to buy a 10-year, zero-coupon bond that will be issued in one year.The face value of the bond is $1,000, and the I-year and I I-year spot Interest rates are 3 percent per annum and 8 percent per annum, respectively. Both of these interest rates are expressed as effective annual yields (EAYs).

a) What is the forward price of your contract?

b) Suppose both the I-year and I I-year spot rates unexpectedly shift downward by 2 percent. What is the price of a forward contract otherwise identical to yours?