Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

problem 1) A zero coupon bond with $100 face value is redeemable at par in exactly four years. You see from financial times that you can at present buy it for $68.3. Your alternative is to invest in a saving account, which pays no periodic interest and give a return of 10.5%. Would you buy the bond?

problem 2) Over the past three years (Year 1 to Year 3) the stocks of two companies, one plc and two plc, generated annual returns to shareholders as follows:

ONE Plc     TWO Plc     
Year 1     –5%     2%
Year 2     15%     1%
Year 3     12%     4%

(i) For each of the three years (Year 1, Year 2, Year 3), find out the annual return generated by a portfolio that is made up of the two stocks one and two with 80 percent of the portfolio invested in stock one and the rest in stock two.

(ii) Based on the annual portfolio returns, find out the expected (average) portfolio return and the standard deviation of portfolio returns.

(iii) Can the standard deviation of the portfolio returns be approximated as the weighted average of the individual stock returns? describe why or why not.

(b) Suppose the Capital Asset Pricing Model (CAPM) holds, compute the expected returns and the risk premia of the following two portfolios.

1. Portfolio 1 has a beta of 1.5; the return on the market portfolio Rm is expected to be 8% and the risk free rate Rf is 1%.

2. Portfolio 2: the estimated correlation coefficient between returns on Portfolio 2 and the market portfolio returns is 0.1, the standard deviation of the market portfolio returns is 3%, and the standard deviation of the returns of Portfolio 2 is 8%; the values of Rm and Rf are as for Portfolio 1.

In each of parts (b1) – (b2), clearly demonstrate the derivation of your results.

problem 3) You have £10,000 and are offered two investment products by a fund manager. The first product is a portfolio that consists of £6,000 worth of risk free treasury bills and £4,000 worth of QW plc shares. The second product is a portfolio that consists of £1,000 worth of QW plc shares and £9,000 worth of CX plc shares. The following information is available:

Return on treasury bills 4% per annum                                 (0.04 p.a.)

Expected rate of return on QW plc shares 15% per annum    (0.15 p.a.)

Standard deviation of QW plc shares 0.35

Expected rate of return on CX plc shares 7.7% per annum      (0.077 p.a.)

Standard deviation of CX plc shares 0.15

Correlation coefficient between QW and CX shares 0.40

Which one of these investment portfolios would you select and why?

Compute expected return/profolio variance/WACC?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M96225

Have any Question? 


Related Questions in Basic Finance

Your firm sells for cash only but it is thinking of

Your firm sells for cash only; but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day. To carry these receiv ...

Assignment- genesis energy capital plan reportthe genesis

Assignment- Genesis Energy Capital Plan Report The Genesis Energy operations management team, nearing completion of its agreement with Sensible Essentials, was asked by senior management to present a capital plan for the ...

You want to save some money for your two dream vacations as

You want to save some money for your two dream vacations as well as have some money available during your retirement years. Today is your 35th birthday. You want to make annual deposit of $10,000 starting on your 40th bi ...

Explain how buying behavior of business customers in

Explain how buying behavior of business customers in different countries may have been a factor in speeding the spread of international marketing.

What is moral hazard why does deposit insurance inherently

What is moral hazard? Why does deposit insurance inherently involve moral hazard? What factors contribute to moral hazard on the internatinal level?

Assignment budget planning and controlbefore approaching

Assignment: Budget Planning and Control Before approaching this assignment, be sure that you have watched the following video. Budgetary Planning featuring Babycakes *FULL VIDEO* . (2016). YouTube.  Babycakes, a specialt ...

Segmented markets theory suppose that the treasury decides

Segmented Markets Theory: Suppose that the Treasury decides to finance its deficit with mostly longterm funds. How could this decision affect the term structure of interest rates? If short-term and long-term markets were ...

Suppose you are a senior fund manager with a large

Suppose you are a senior fund manager with a large investment company. You are a proponent of the Efficient Market Hypothesis (EMH) and you are an advocate of the use of the Capital Asset Pricing Model (CAPM), the single ...

Choose three of the stocks - two within the same industry

Choose three of the stocks - two within the same industry plus one additional stock - from the Company Selection and Stock Watch completed in module 03 and then locate interest rates on two other investments that are not ...

Impact of expected inflation how might expectations of

Impact of Expected Inflation: How might expectations of higher oil prices affect the demand for loanable funds, the supply of loanable funds, and interest rates in the United States? Will the interest rates of other coun ...

  • 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

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate