A two-stock portfolio consists of the following: The portfolio consists of stock of Green Company (portfolio weight 30%) and Blue Company (portfolio weight 70%). Green’s expected return is 12%, Blue’s is 8%. Interest rates are expected to be 6%. Oil prices are expected to rise 2%. The two-factor model for Green Company is R(green) = 12% − 0.5 Fint − 0.5 Foil + egreen The two-factor model for Blue Company is R(blue) = 8% + 0.8 Fint + 0.4 Foil + eblue If interest rates are actually 9% and oil prices do not rise, the return on the portfolio will be: A) 10.17%. B) 12.89%. C) 10.55%.
Rgreen=12-0.5*3-0.5(-2)=11.5 RBlue=8+0.8*3+0.4(-2) = 9.6 Portfolio=.3*11.5+0.7*9.6=10.17%
why did you take -2 for oil?
expected to rise 2%, but did not rise. so surprise was 0 - 2 = -2.
Rgreen=12-0.5*3-0.5(-2)=11.5 Why do you subtract the interest component rather than add them? (-0.5*3) Was it a negative sign in the equation? Sorry it wasn’t clear. Thanks!
− is the - sign… that’s how stuff gets pasted here on the web page.
Interest rates are expected to be 6%. interest rates are actually 9% Positive Surprise = 3% Green company has a negative sensitivity over Interest increase (as indicated by the -ve sign in the equation), so this unexpected positive surpise was bad for them and good for Blue compnay (+ve sensitivity to Interest factor)
Thanks for clarifying guys/girls!
what’s the answer?? it’s killing me…
A
its A. CPK never gets anything wrong, my friend!