Question

1. You have had a portfolio made up of three assets. For each of these three assets, pricing data are below:

Price at the end of	Common stock A	Preferred Stock B	Coupon Bond C
year 0	$28	$100	$1,040
year 1	$30	$100	$1,050
year 2	$35	$102	$1,040
year 3	$41	$103	$1,050
year 4 (now)	$44	$105	$1,060

The common stock pays a common dividend of $2 at the end of each year. The preferred stock pays a dividend of 5% based upon a face value of $100 at the end of each year. The bonds have a coupon rate of 5% and carry a current YTM of 4.5%. You bought 100 shares of Common Stock A, 50 shares of Preferred Stock B, and 3 Coupon Bonds C, all at the beginning of the period (Year 0).

1. What is your total dollar return on portfolio over the entire period? What is your holding period return on the portfolio over the entire period?

Answer 1

Answer-

a) total dollar return on portfolio over the entire period :

Common stock bought =100

Price pai for common stock=$28/Share

Total Amount Paid=100*28=$2,800

Total Dividend received at the end of year 4=2*4*100=$800

Return on common stock in dollar terms for the entire period=800+(44-28)*100=$2,400

Similarly of Preferred stock :

Total value return in $ terms for entire period =50*(105-100)+0.05*100*50*4=250+1000=$1,250

Coupon Bonds:

Total value obtained from the coupon payments considering at the end of 4 years the bond doesn't mature:

We are not given Fv of Bond let's try to find that:

Coupon payments/Current Price=present YTM

Coupon Payment=0.045*1040=46.80

FV* coupon rate=46.80

FV=46.80/0.05= $936

Therefore the annual coupon payments will be $46.80

At the end of 4 year total coupn payments received= 4*46.80+936=$187.20(assuming the payments are paid annually)

Therfore total dollar return of the portfolio for the stated holding period of 4 years=$2,400+$1,250+$187.20=$4773.20

b) Holding period return of the entire portfolio=( total return realized/non realized)/Total cost of purchase=4773.20/(100*28+50*100+1040*3)=3837.20/10800=44.20%