M.B. University had an endowment worth $100 million. Of this amount, $25 million was invested in treasury bills, and $75 million was invested in the market portfolio. By the following December 31, MBU had earned $2 million in interest and had received dividends of $3 million. These amounts were considered as income and used to pay the current expenses of the university. Except for rolling over treasury bills, no portfolio transactions were undertaken. Although on December 31, MBU’s portfolio still held the same number of shares in the market portfolio, the market value of these shares had declined to $60 million because of a general decline in stock prices.
Chapter 8 #3 On January 1, M.B. University had an endowment worth $100 million. Of this amount, $25 million was invested in treasury bills, and $75 million was invested in the market portfolio. By the following December 31, MBU had earned $2 million in interest and had received dividends of $3 million. These amounts were considered as income and used to pay the current expenses of the university. Except for rolling over treasury bills, no portfolio transactions were undertaken. Although on December 31, MBU’s portfolio still held the same number of shares in the market portfolio, the market value of these shares had declined to $60 million because of a general decline in stock prices.
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- What was the expected annual
rate of return on MBU’s portfolio on January 1 and its standard deviation? - What was the actual rate of return earned?
- What was the expected annual
Expected annual return is the amount expected to gain at the end of the year by dividing it by the initial investment of the individuals.
Standard deviations is a measure of how spread out the numbers are from the mean.
1. Expected annual return= Return from treasury + Return from share market
Standard deviation of 2,3 is 0.5.
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