Microsoft Word - FNCE3000_HW
FNCE 3000 — Group Project 1 (hard copy due in class, Thurs. 10/19)
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If you have to make any additional assumptions, be sure to state them upfront. Hand in all
elevant information/charts/calculations used to derive your answers so that I can quickly
follow your thought process and where your numbers are coming from.
Be sure to include all of your names on the first page of your homework submission.
Source: http:
www.wellsfargo.com/mortgage
ates/ [rates as of: September 14, 2017]
^^ Use the information provided to answer the questions on the following page.
NOTE: the above quotes denote annual percentage rates (APR), compounded monthly.
FNCE 3000 — Group Project 1 (hard copy due in class, Thurs. 10/19)
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You want to buy a $1,000,000 house. Suppose you make a 20% down payment today, and
you finance the rest of your purchase with a 30‐year fixed rate jumbo mortgage.
1) What will be your monthly mortgage payments?
2) How much of your first month’s payment goes toward paying off interest? How much
goes toward paying off the loan balance?
3) How much do you still owe after 5 years (i.e., just after your 60th monthly payment)?
4) How long will it take you to reduce your loan balance by half (i.e., ≤ $400,000)?
5) Suppose in 20 years (just after your 240th monthly payment), you decide to refinance
at a 10‐year fixed rate of 3.200%. What will be your new monthly mortgage
payments?
FNCE 3000 — Group Project 1 (hard copy due in class, Thurs. 10/19)
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Source: finance.yahoo.com [snapshots taken on: September 14, 2017]
Provide the following analyses pertaining to a portfolio comprised of common stock issued
y Microsoft Corporation and common stock issued by The Coca‐Cola Company (you will
need additional data provided on finance.yahoo.com—in the “Get Quotes” box, type in
“MSFT” and “KO”). Be sure to state any additional assumptions upfront, and to print out,
highlight, and hand in all relevant information that you use to calculate your answers so that
I can quickly follow where your numbers are coming from.
FNCE 3000 — Group Project 1 (hard copy due in class, Thurs. 10/19)
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In your calculations below, assume that the annual risk‐free rate is rf=2%.
Part 1: Estimate the Market Risk Premium
Estimate the (annual) market risk premium using the five‐year time series of monthly
pricing data from October 2012 through October 2017 (inclusive). Use the S&P500
Composite Index as your proxy for the “market” (in the “Get Quotes” box type “^GSPC”).
The monthly closing prices are provided under the “historical prices” tab. From here, you
can calculate monthly stock returns. The prices reported here are adjusted prices—which
means stock splits and dividend payments have already been factored in such that you need
only to calculate the percentage change in these ‘adjusted’ prices to derive the stock returns.
I don’t need to see the *full* history of returns calculations, but I’d like a printout of the first
few calculations so that I can follow your work.
Part 2: Calculate Portfolio Expected Return and Historical Volatility
Suppose you invest half of your wealth in MSFT and the other half in KO.
1. Assuming that CAPM holds, what is the annual expected return on your portfolio?
Based on the five‐year period spanning October 2012 through October 2017…
2. What is the annualized historical volatility of your portfolio returns?
3. What is the annualized average return?
4. What is the realized return on your investment if you purchased this portfolio on the
first trading day of October 2012 and sold it on the last trading day of October 2017?
Part 3: Calculate Betas
Try estimating beta yourself (for both MSFT and KO) using the five‐year time series of
monthly stock returns from October 2012 through October 2017 (inclusive).
Recall that a stock’s beta is calculated as: the covariance between its excess returns and
excess market returns (for simplicity, you can just use S&P 500 index returns), divided by
the variance of excess market returns—i.e., Cov(rM,ri)/var(rM). (‘excess return’ refers to the
eturn in excess of the riskless rate).