Homework Assignment 4
Problem 1 (50 points)
Use the data from “Beating the Market Quarterly” problem. Use that data to estimate expected returns and a covariance table for the 5 stocks from that problem. Use your estimates to find the portfolio that maximizes return among portfolios that have standard deviation of no more than 10%. Assume you’re required to hold a position in each of the five stocks and this position needs to be between 5% and 30%.
Problem 2 (50 points)
Pinapple Inc. is deciding how to price its two lines of laptops, one of which is a light one for travel (which is called Light) and the other is a powerful one (called Power). These products are substitutes (consumers pick between them depending on prices). Based on the data points below, estimate a linear joint demand curve – that is, a demand curve for each product that is linear in each price:
Demand_Power = A_1 + B_1*Price_Power + C_1*Price_Light
Demand_Light = A_2 + B_2*Price_Power + C_2*Price_Light
Price of
Power
Price of
Light
Demand of
Power
(in thousands)
Demand of
Light
(in thousands)
1000
1000
15166
7311
1500
1000
12266
7387
2000
1000
10875
7499
2000
1500
10222
5992
2500
1500
7771
6398
3000
1500
4410
6210
3000
2000
5320
4431
Use your estimated demand curve to recommend prices for the two products to the CEO of Pinapple Inc. The cost of manufacturing a Light computer is $770 and the cost of manufacturing a Power computer is $930. Make sure the prices you recommend are within the ranges tested ($1000 to $3000 for the Power and $1000 to $2000 for the Light). You should also include in your report a comparison of the profit margins of the two products.