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Problem: If a portfolio is on the capital market line, show that it is perfectly correlated with the market portfolio. Is its beta 1?
An investor has a $10,000 portfolio that is allocated as follows: short 100 shares of stock A, buy 250 shares of B and 200 shares of 3. Any additional funds are borrowed or lent at the risk fr
If last year average market return was 7%, what would you expect the return on the security to be? Explain. If you think there is not enough information to answer the question, explain why.
a) Compute the payback period of this project. b) Compute the discounted payback period of this project assuming a discount rate of 5%.
Suppose that a risk averse individual has $1, and there are three assets; one safe, and two risky. The safe one yields a sure rate of return of 1. The risky ones have distribution functions F(y1) an
1) According to the Modigliani-Miller model, what is the value of company UU and company LL? Explain.
In view of all of microeconomic concepts such as competition, markets vs Cental Command, Coarse's theorm, hidden costs, allocative efficiency, and market forces, why would it make sense to outsource
What role does a financial department play in valuing business opportunities and what are some of the key financial concepts that valuation work must consider?
Suppose that the following Social Security reform became law: All current Social Security recipients will continue to receive their benefits, but no increase will be made other than cost-of-living
Estimate the cost of capital for each firm. Which company will generate more shareholder value?
The Bonds of Microfood, Inc. carry a 10% annual coupon, have a $1,000 face value, and nature in 4 years. Bonds of equivalent risk yield 7%. The market value of the bonds should be (assume annual com
Why is there a difference between the book value and market value ? After all if you buy all the stock aren't you simply buying the total assets and assuming the total liabilities of the firm?
For each of the following four groups of companies, state whether you would expect them to distribute a relatively high or low proportion of current earnings and whether you would expect them to hav
Projects A and B are mutually exclusive, whereas all other projects are independent. None of the projects will be repeated. The following table summarizes the cash flows, internal rate of return (IR
The growth rate of Campbell Company is expected to be 4% for 1 year, 5% the next year, then 6 % for the following year and then the growth rate is expected to continue at 7%. The company paid a divi
The investment's expected return is 10 percent. The projected cash flows for years 1, 2, 3 are $100, $200, and $300 respectively. What is the annual cash flow received for each of the years 4 throug
The market required rate of return is 14 percent and the risk free rate is 6 percent, how do I determine the fund's required rate of return.
Discuss how the CAPM might be used in capital budgeting decisions and utility rate decisions.
Construct a decision tree and determine whether the Beauty Company should introduce the new beauty cream or use its funds to purchase Treasury bills.
The rate of return on perfectly safe Treasury Bills is 2%. Your client chooses to invest $70,000 of her portfolio in your equity fund and $30,000 in T-bills. What is the expected return and standard
1) If you wanted to invest in Stocks A and B in such a way as to minimize risk, what weights should you put on the two stocks? 2) What would the portfolio expected return and standard deviation be for
If you go long, what is your expected outcome per share? What is the most you can make by going short? If you were mildly risk averse, would you choose going long or short?
Problem: The risk-free rate is again 3%. The expected return on the market is 9%. A particular security offers an expected return of 2 percent. Assuming that capital markets are in equilibrium, what
a. What is the arithmetic mean return of the two stocks? b. What's their geometric mean return? c. Which one would you rather have bought, in retrospect? Why?
1) If you are an expected-return maximizer, what action would you prefer? Show why. 2) If your basis for preferring an action is to minimize risk, which action would you prefer? Why? 3) Dr