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

1 explain what happens to the postmerger earnings per share

1. Explain what happens to the postmerger earnings per share figure when a company with a relatively high P/E ratio acquires a company with a lower P/E ratio, assuming that the exchange ratio is based on current stock ma ...

Does depreciation affect cash flow in a positive or

Does depreciation affect cash flow in a positive or negative manner? From a net present-value perspective, why is accelerated depreciation preferable? Is it acceptable to utilize one depreciation method for tax purposes ...

In 2013 the lissa company paid dividends of 10000000 on

In 2013, the Lissa Company paid dividends of $10,000,000 on after-tax income (cash flow) of $25,000,000. Capital budget projects totaled $15,000,000 in 2013.   2013 was a normal year for earnings, dividends, and capital ...

Calculating cost of equitythe dybvig corporations common

Calculating Cost of Equity The Dybvig Corporation's common stock has a beta of 1.7. If the risk-free rate is 4.8 percent and the expected return on the market is 10 percent, what is Dybvig's cost of equity capital? (Do n ...

Suppose that you observe a european call option that is

Suppose that you observe a European call option that is priced at less than the value Max[0, S0 - X(1 + r)-T ]. What type of transaction should you execute to achieve the maximum benefit? Demonstrate that your strategy i ...

1 what is an estoppel why is it used2 what is meant by loss

1. What is an estoppel? Why is it used? 2. What is meant by "loss to lease"? Explain. 3. What are (a) pass through expenses, (b) recoverable expenses, and (c) common area expenses? Give examples of each.

At approximately what percentage of the ultimate tensile

At approximately what percentage of the ultimate tensile stress (UTS) does a common bolt (e.g., ASTM A490 or SAE J429 GR 8) yield in pure tension? Name two simple ways to pick a preload ? What's the easiest way to pick a ...

1 why are scientists skeptical of post hoc explanations2

1. Why are scientists skeptical of post hoc explanations? 2. Why are operational definitions important in research?

If us-based mncs are concerned with how shareholders react

If US-based MNCs are concerned with how shareholders react to changes in consolidated earnings, but prefer not to hedge their translation exposure, how might they attempt to reduce shareholder reaction to a decline in co ...

1 holding the cutoff period fixed which method has a more

1. Holding the cutoff period fixed, which method has a more severe bias against long-lived projects, payback or discounted payback? 2. For a firm that uses the NPV rule to make investment decisions, what consequences res ...

  • 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