Corporate Finance Chapter 7 Model Questions

QUESTION 2 Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. ​ ​  Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases. The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases. The standard deviation of the portfolio returns increases as the coefficient of correlation increases. The standard deviation of the portfolio returns decreases as the coefficient of correlation increases. The standard deviation of the portfolio returns increases as the coefficient of correlation decreases.

course: advanced microeconomics

The value of Jon’s stock portfolio is given by the function v(t) = 50 + 77t + 3t2,  where v is the value of the portfolio in hundreds of dollars and t is the time in months.  How much money did Jon start with? (y-intercept) What is the minimum value of Jon’s portfolio? (vertex)

5. You have been hired as a portfolio manager for a fancy hedge fund. Your first job is to invest $100,000 in a portfolio of two assets. The first asset is a safe asset with a certain return of 5%. The second asset is shares of a dying video-game store that has become popular with retail investors, it has a 20% expected rate of return, but the standard deviation of this return is 10%. Your manager wants a portfolio with as high a rate of return as possible while keeping the standard deviation at or below 4%. How much of the fund's money do you invest in the safe asset?

You are evaluating the possibility that your company bids $150,000 for a particular construction job. (a) If a bid of $150,000 corresponds to a relative bid of 1.20, what is the dollar profit that your company would make from winning the job with this bid? Show your work. (b) Calculate an estimate of the expected profit of the bid of $150,000 for this job. Assume that, historically, 55 percent of the bids of an average bidder for this type of job would exceed the bid ratio of 1.20. Assume also that you are bidding against three other construction companies. Show your work.

Question 11 The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio is a) 36.30%. b) 5.84%. c) 19.60%. d) 24.17%. e) 26.0%.

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Question 5 You negotiate with a retailer over a contract according to which the retailer would buy a large fraction of your current production for next year. The retailer is perfectly informed about consumer demand, but you do not know whether demand is high or low. You only know that the probability for high demand is 80%. If demand is high, the retailer's profit is £5 million minus what he pays to you according to your contract. If demand is low, the retailer's profit is £3 million minus what he pays to you. Your costs of producing the output specified in the contract are £1 million. You can make sequential offers for the retailer's total payment for you to deliver a fixed quantity of your production. As you know that your competitor is also seeking a similar contract with this retailer, and the retailer can only supply one firm due to limited shelf space, you know that you can only make at most two offers. If your first offer is rejected, the retailer will strike the deal with your…

Please help me fix c. Thanks!

3. The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions.  (a)  Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset? (b)  Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected return and standard deviation of the investor’s optimal complete portfolio?

10. Which one of the following measures may be used to measure the risk of an investment on its own? a) Expected return of the investment. b) Expected utility of the investment for an investor. c) Standard deviation of the possible outcomes of the investment. d) The Bernoullian utility function's value of a good investment outcome.

If investors want portfolios with small risk, should they look for investments that have positive covariance, have negative covariance, or are uncorrelated? Does a portfolio formed from the mix of three investments have more risk than a portfolio formed from two?

5. You are a risk-averse decision maker with a utility function U(1) = VI, where I denotes your income. Your income is $100,000 (thus, I=100). However, there is a 0.2 chance that you will have an accident that results in a loss of $10,000. Now, suppose you have the opportunity to purchase an insurance policy that fully insures you against this loss (i.e., that pays you $10,000 in the event that you incur the loss). What is the highest premium that you would be willing to pay for this insurance policy?

Consider an investment that pays off $700 or $1,600 per $1,000 invested with equal probability. Suppose you have $1,000 but are willing to borrow to increase your expected return. What would happen to the expected value and standard deviation of the investment if you borrowed an additional $1,000 and invested a total of $2,000? What if you borrowed $2,000 to invest a total of $3,000? Instructions: Fill in the table below to answer the questions above. Enter your responses as whole numbers and enter percentage values as percentages not decimals (.e., 20% not 0.20). Enter a negative sign (-) to indicate a negative number if necessary. Invest $1,000 Invest $2,000 Invest $3,000 Expected Value Percent Increase Standard Deviation 1150 S 28 % $ 8 % $ Expected Return N/A Doubled Tripled : #

Suppose the expected return on the tangent portfolio is 12% and its volatility is 30%.The risk-free rate is 3%.(a) What is the equation of the Capital Market Line (CML)?(b) What is the standard deviation of an efficient portfolio whose expected return of16.5%? How would you allocate $3,000 to achieve this position

What is the expected return from an investment if there is a 20 percent chance of a 4 percent return, a 40 percent chance of a 8 percent return, and a 40 percent chance of a 12 percent return

Question 3 Suppose you hold a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. Now, suppose you have decided to sell one of the stocks in your portfolio with a beta equal to 1.0 for 7,500 and to use these proceeds to buy another stocks for your portfolio. Assume the new stock's beta to 1.75. Calculate your portfolio's new beta.

8. Risk and return Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A BUDW C E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 3.50 7.50 11.50 15.50 19.50 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 Sell some of her stocks and place the proceeds in a savings account O Sell some of her bonds and use the proceeds to purchase stocks Accept more risk Sell some of her stocks and use the proceeds to purchase bonds 15 20 As the risk of Caroline's portfolio increases, the average annual return on her portfolio Suppose Caroline currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio to risk-free bonds; that is, she chooses combination B. She wants to increase the…

Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both Stocks A and C, and 30 percent in Stock B? (see attached chart)

Optimal Portfolio: Mean-Variance OptimizationIf you are a portfolio manager who predicted that the tension in Ukraine might spiral into a global economic problem back in December 2021. She decided to construct a portfolio that, she think, would outperform in a war scenario, or in a heightened war risk scenario. Please use the following ETFs:IAU: iShares Gold Trust ETFVDE: Vanguard Energy ETFXLB: Materials Sector SPDR ETFDBC: Invesco DB Commodity Index Tracking FundCQQQ: China Technology Index ETFConstraints:i. Use all ETF products. (Weight of each ETF>= 2% )ii. No ETF is to have more than 40% weight in portfolioObjective: Maximize Expected Return, Minimize volatility, ie. MaximizeSharpe RatioStep 1: Collect historical price/return data for the ETFs over Jan-2018 to Dec-21 period.Step 2: Assume the Average Historical Return is the Expected Return for each asset (strong assumption) and Historical Volatility is the Expected Volatility (strong assumption).Step 3: Present the var-cov…

A wheel of fortune in a gambling casino has 54 different slots in which the wheel pointer can stop. Four of the 54 slots contain the number 9. For $3 bet on hitting a 9, if he or she succeeds, the gambler wins $16 plus return of the $3 bet. What is the expected value of this gambling game? (Present your answer in dollars with 2 decimal places but without $ sign)

Hello can any one help with this Economics question: A contractor spends Dollar 3,000 to prepare for a bid on a construction project which, after deducting manufacturing expenses and the cost of bidding, will yield a profit of dollar 25,000 if the bid is won. If the chance of winning the bid is ten per cent, compute his expected profit and state the likely decision on whether to bid or not to bid?

a. Suppose you forecast that the standard deviation of the market return will be 20% in the coming year. If the measure of risk aversion in Equation 5.16 is A = 4, what would be a reasonable guess for the expected market risk premium? b. What value of A is consistent with a risk premium of 9%? C. What will happen to the risk premium if investors become more risk tolerant? (LO 5-4)

The variance of six-monthly changes in the price of a commodity is 90.25, the variance of six-monthly changes in the futures price of the commodity is 110.25 and the coefficient of correlation between the two changes is 0.85. A company plans to buy 10,000 units of the commodity in 6 months, the size of the futures contract is on 1,000 units of the commodity and the delivery date of the contract is in 9 months. Consider the following statements. I. The optimal hedge ratio if the futures contract that is used to hedge is 0.6958. II. The hedging effectiveness of the futures contract is 0.85. II. The company should hedge by buying 7.69 futures contracts. IV. If the company hedges optimally, the difference between the variance of the unhedged position and the variance of the optimally hedged position would be 65.21. Which of the following is correct? a. Statement I, |l and IIl are incorrect, Statement IV is correct. O b. Statement I and Il are incorrect, Statement IIlI and IV are correct.…

Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment To maximize your expected return, you should choose: Stocks Bonds Probability Return Probability Return 0.15 20% 0.15 16.7% 06 10% T 04 7.5% 0.25 8% 0.45 3.3% OA bonds OB stocks OC. commodities OD. All of the portfolios have the same expected return. If you are risk-averse and had to choose between the stock or the bond investments, you would choose OA the stock portfolio because there is less uncertainty over the outcome OB. the bond portfolio because there is less uncertainty over the outcome. OC. the stock portfolio because of greater expected return. OD. the bond portfolio because of greater expected return. Commodities Probability Return 02 20% 0.2 15% 0.2 8% 02 02 5% 0%

6. Policyholders are assumed to have a utility function u(x) = e- where > 0 varies between policyholders following an exponential distribution with unknown mean. An insurance company sells an insurance policy which covers a risk which causes a loss of $6,000 with probability 0.4. There are 3,000,000 potential customers for this policy. The insurer finds that when the premium for the policy is set to $3000, they are able to sell 952,000 policies. How many policies would they sell if they increased the premium to $4,000?

19. An individual has initial wealth Wo = 3 and has the opportunity to invest some quantity of money x in an extremely risky corporate bond. With probability p= 1/4, the bond will be worth 10x at maturity. With probability 1 – p, it will be worth zero. The individual's utility function over final wealth is u(W) = W0.5. What is the level of investment x that maximizes expected utility? (а) 0 (b) 1 (c) 4/3 (d) V3 (e) 2

Online sale Suppose a student is considering selling their used smartphone online. They can sell it now for $p or wait and sell it next month for a different price. If they wait, they will receive a random offer with an equal probability of being either $300 or $100. The student can only receive one offer and cannot sell the phone after the second month. 1. Calculate the expected price in the next month. 2. Suppose that the current price p is equal to 200. (a) Give a reason why selling today could be a good idea. (b) Give a reason why selling next month could be a good idea.

17. Suppose a risk-neutral power plant needs 10,000 tons of coal for its operations next month. It is uncertain about the future price of coal. Today it sells for $60 a ton but next month it could be $50 or $70 (with equal probability). How much would the power plant be willing to pay today for an option to buy a ton of coal next month at today's price? (Ignore discounting over the short period of a month.) а. 5 b. 4 с. 3 d. NOTE: I KNOW THAT THE ANSWER IS (A), BUT PLEASE INCLUDE ALL THE STEPS HOW TO SOLVE THE PROBLEM BECAUSE I NEED TO PRACTICE. THANK YOU.

3. You’ve observed the following returns on Regina computer stock over the past five years: 7%, -12%, 11%, 38% and 14% a.) What was the arithmetic average return on Regina stock over this five-year period? b.) What was the variance of Regina returns over this period? The standard deviation?

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Need all four questions