Ask Question, Ask an Expert


Ask Basic Finance Expert

2275_Scatter plot.jpg

1. The figure above is a scatter plot of the returns of two assets against the return of the market. Both assets have the same expected return and the same variance. Which asset would you prefer to hold if your portfolio contained many stocks? Asset 1 is on the left and Asset 2 on the right.

(a) Asset 1
(b) Asset 2

2. You have to pick one stock that will form your entire portfolio. Which stock will you not pick?

Stock Expected return    Std.Dev.

  A             10                    15
  B              9                     13
  C              5                     15
  D             10                    8

(a) Stock A

(b) Stocks A, B, and C

(c) Stock D

(d) Stocks B and C

Answer the next three problems with reference to this information

Form a portfolio of stocks X and Y and the risk-free asset, such that the standard deviation of my portfolio's return will be 13%. The correlation between these two assets is 0, and that the standard deviations of the two assets are 10% and 15% respectively. You know that the tangency portfolio of just these two risky assets invests 2/3 in asset X.

3. What is the standard deviation of the return of the tangency portfolio?

(a) 8.33%
(b) 11.11%
(c) 12%
(d) 13%

4. Assuming you invest a positive amount in the risky asset, what is the weight of the risky asset in your  final portfolio?

(a) -0.56
(b) 0.083
(c) 0.44
(d) 1.56

5. If you had $200 to invest, how many dollars would you invest in asset X?

(a) 133.33
(b) 192
(c) 200
(d) 208

6. You hold the market portfolio. there is a graph plotted Security Market Line (SML) below also plotted an asset, A (the black dot). According to the diagram:

2200_Security market line.jpg

(a) A is overpriced and you should not buy it, but you could short-sell it
(b) A is underpriced and you should buy it
(c) A is correctly priced and you are indifferent between buying and selling it

7. All investors like expected return and hate standard deviation. There are three stocks which are the only risky assets in the world. You have the following information:

Stock Number of shares outstanding Price per share

A 10000 $25
B 20000 $32

Construct the lowest-variance portfolio that has the same expected return as the market portfolio. What is the portfolio you choose?

(a) 1/3 in A, 2/3 in B
(b) .28 in A, .72 in B
(c) .41 in A, .59 in B
(d) Impossible to say, we would need the risk-free rate to tell.

8. There are no taxes. Empanada Mama is a New York-based restaurant chain that is thinking of expanding to California. It is entirely  financed with equity, and the beta of its equity is 1. The empanada business is significantly different in California:

Latin American food is much more common and the competition is fierce. There is an empanada chain, called LA Empanada, in Los Angeles, which is financed with $40 of debt and $100 of equity (book values). The debt is risk-free. LA Empanada has 30 shares outstanding, and the current price of its shares is $2. The beta of its equity is 2. What is the beta you will use to find out the NPV of Empanada Mama's venture in California?

(a) 1
(b) 1.2
(c) 1.43
(d) 2

9. What is the YTM on a 1 year, semiannual payment 10% coupon bond with face value $1000 and price $900?

(a) 5.63%
(b) 10.82%
(c) 21.64%
(d) 22.81%

10. A one-year zero coupon bond has face value $5,000. The issuer may default, and the probability of default is 0.1. In default, the bond pays nothing. Instruments of similar risk pay 6% (e
ective annual). What is the YTM on this bond, expressed as an APR with annual compounding?

(a) 6%
(b) 12%
(c) 13.01%
(d) 17.78%

Answer the following two problems with respect to this information A firm's equity had a book value of $400M last year. ROE is 10% and it retains one-fourth of its earnings. Instruments of the same risk as the equity pay 12%.

11. Assuming it maintains its ROE and payout ratios, what is the expected total dividend next year in $M?

(a) 10
(b) 10.25
(c) 30
(d) 30.75

12. What should the market value of the equity be?

(a) $323.68M
(b) $315.79M
(c) $256.25M

Answer the following four problems with respect to this information There are no taxes or other frictions. Two companies, GOOG and YHOO, have the same assets. They will both last only one period. GOOG is all-equity, but YHOO has zero-coupon risk-free debt with face value $105,000. The companies can have three possible values of EBITDA next year: $105,000, $200,000 and $500,000 with equal probability for each. The beta of the cash flows is 0.6, the risk-free rate is 5% and the market risk premium is 7%. 13. What is the value of GOOG's equity?

(a) 245,726
(b) 191,933
(c) 105,110

14. What is the value of YHOO's debt?

(a) $100,000
(b) $105,000
(c) $90,000

15. What is the value of YHOO's equity?

(a) $100,000
(b) $145,726
(c) $200,116

16. What does the CAPM say the expected return on YHOO's equity should be?

(a) 11.125%
(b) 12.08%
(c) 14.11%

Answer the following three problems with respect to this information Two companies, One and Two, have the same assets, and will make the same EBITDA of $20 for certain each period forever. They have no depreciation. The tax rate is 40%. Company One has perpetual risk-free debt worth $100. The risk-free interest rate is 4%.

17. What is the coupon on Company One's debt?

(a) $10
(b) $4
(c) $5

18. What is the value of Company Two's equity?

(a) $200
(b) $300
(c) $400

19. What is the value of Company One's equity?

(a) $180
(b) $200
(c) $240
(d) $300

20. The tax rate is 0%, and the risk-free interest rate is 10%. Assume all betas are 0. An all-equity financed  firm lasts for one period and has a value of $100. It is thinking of changing its capital structure, without changing its assets. If it takes on $50 worth of debt (market value), its equity would be worth $48. This means that the expected value of bankruptcy costs next period is:

(a) $2
(b) $2.2
(c) $4
(d) $5.5

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M92022

Have any Question? 

Related Questions in Basic Finance

1 compare the ethical dilemmas faced by behavioral

1. Compare the ethical dilemmas faced by behavioral scientists with those faced by scientists in other scientific fields. What are the particular ethical problems that arise in behavioral science research? 2. Explain why ...

1 write the general form of a regression equation that has

1. Write the general form of a regression equation that has a single predictor variable. Identify the criterion variable, the predictor variable, the regression constant, and the regression coefficient. 2. A regression e ...

Assignment - merger acquisition and international

Assignment - Merger, Acquisition, and International Strategies Choose two (2) public corporations in an industry with which you are familiar - one (1) that has acquired another company and operates internationally and on ...

Moonbeam electronics profiting from a foreign trade

MOONBEAM ELECTRONICS PROFITING FROM A FOREIGN TRADE ZONE Located in southwest Missouri,Moonbeam Electronics is a manufacturer of small electrical appliances, such as toasters, toaster ovens, can openers, mixers, and blen ...

On august 20 a stock index futures which expires on

On August 20 a stock index futures, which expires on September 20, was priced at 429.70. The index was at 428.51. The dividend yield was 2.7 percent. Discuss the concept of the implied repo rate on an index arbitrage tra ...

A bond with a par value of 100000 and a semiannual coupon

A bond with a par value of $1,000.00 and a semiannual coupon has a nominal yield to maturity of 5.30% and a current price of $920.00. If the bond has 6 years to maturity, what is its current yield? 4.23% 4.34% 0.00% 4.18 ...

1 why do researchers use inferential statistics2

1. Why do researchers use inferential statistics? 2. Distinguish between the null hypothesis and the experimental hypothesis. 3. When analyzing data, why do researchers test the null hypothesis rather than the experiment ...

Assume the followingerm 7rf 2expected risk premium on

Assume the following: E(rM) = 7% rF = 2% Expected risk premium on Boeing stock = 7% What is the expected return on Boeing stock? Show your work

1 when are tests of simple main effects used and what do

1. When are tests of simple main effects used, and what do researchers learn from them? 2. Who developed the rationale and computations for the analysis of variance? 3. Under what two circumstances would you use a multiv ...

Aol is considering two proposals to overhaul its network

AOL is considering two proposals to overhaul its network infrastructure.  They have received two bids.  The first bid from Huawei will require a $18 million upfront investment and will generate $20 million in savings for ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen