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New PDF release: Financial Theory and Corporate Policy FOURTH EDITION STUDENT

By J. Fred Weston, Kuldeep Shastri Thomas E. Copeland

ISBN-10: 0321179544

ISBN-13: 9780321179548

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4. Let nj = the number of shares the investor can buy if she buys only j, and nk the number she can buy if she buys only k. Then W W 1,200 1,200 nj = 0 = = 120; n k = 0 = = 100 (a) Pj 10 Pk 12 If she buys j: W1 = njQj1 = 120(10) = $1,200 final wealth in state 1 W2 = njQj2 = 120(12) = $1,440 final wealth in state 2 If she buys k: W1 = nkQk1 = 100(20) = $2,000 final wealth in state 1 W2 = nkQk2 = 100(8) = $800 final wealth in state 2 (b) For sales of j and purchases of k: If she sells –nj shares of j, she receives –njPj, and with her initial wealth W0 she will have –njPj + W0; with this she can buy at most (–njPj + W0)/Pk shares of k which will return at least [(–njPj + W0)/Pk]Qk2; she must pay out at most –njQj2.

Semi-variance is important to risk-averse investors who are more concerned with downside risk (losses) than gains. 4. First, recall the definition of covariance. cov(x, y) = E[(x – E(x))(y – E(y))] Multiplying the factors in brackets on the right-hand side, we have cov(x, y) = E[(xy – xE(y) – yE(x) + E(x)E(y)] and taking the expectation of the right-hand side we have cov(x, y) = E(xy) – E(x)E(y) – E(y)E(x) + E(x)E(y) cov(x, y) = E(xy) – E(x)E(y) Therefore, E(xy) = cov(x, y) + E(x)E(y) Chapter 5 Objects of Choice: Mean-Variance Portfolio Theory 5.

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Financial Theory and Corporate Policy FOURTH EDITION STUDENT SOLUTIONS MANUAL by J. Fred Weston, Kuldeep Shastri Thomas E. Copeland


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