Week4_FIN2062a_Feb2_PracticeQs_Ch1516_Answers

Question 5: Portfolio Performance Evaluation; International Diversification Your uncle invested $1,000,000 in a portfolio consisting of both equity shares and bonds at the end of 2013. He did not buy nor sell any securities thereafter. The following table provides end of the year market values of the portfolio together with the dividend income and coupon income generated by it for the five years ending in 2018: Year Market value of the I. 2013 2014 2015 2016 2017 2018 (i) (ii) (iii) portfolio $1,000,000 $1,200,000 $1,100,000 $1,350,000 $1,150,000 $1,200,000 Dividend income $110,000 $90,000 $120,000 $80,000 $90,000 Coupon income $50,000 $50,000 $50,000 $50,000 $50,000 Calculate the annual rates of return for the five years ending in 2018. Calculate the arithmetic average return and the geometric average return for the portfolio for the five-year period ending in 2018. Given your answer to (ii) above, which measure of average return is more useful in predicting the future performance of…

Question content area top Part 1 ​(Capital asset pricing​ model)  ​Anita, Inc. is considering the following investments. The current rate on Treasury bills is 7 ​percent, and the expected return for the market is 12.5 percent. Using the​ CAPM, what rates of return should Anita require for each individual​ security?   Stock Beta H 0.71 T 1.62 P 0.89 W 1.37 ​(Click on the icon    in order to copy its contents into a spreadsheet.​)       Question content area bottom Part 1 a.  The expected rate of return for security​ H, which has a beta of 0.71​, is enter your response here​%. ​(Round to two decimal​ places.) Part 2 b.  The expected rate of return for security​ T, which has a beta of 1.62​, is enter your response here​%. ​(Round to two decimal​ places.) Part 3 c.  The expected rate of return for security​ P, which has a beta of 0.89​, is enter your response here​%. ​(Round to two decimal​ places.) Part 4 d. The expected rate of return for…

Questions 6 The performance (%) of one stock and one bond over the past four years is as follows: Return Return Return in 2018 Return in 2019 Return in 2020 Average standard in 2017 return deviation Stock Bond 20 -30 25 15 25.33 1 3 3.75 ? a) What is the average return of the stock? b) What is the standard deviation of the bond? c) What are the two lessons from the capital market history?

Assume the risk-free rate on long-term Treasury bonds is 6.04%.  Assume also that the average annual return on the Winslow 5000 is 11% as the expected return on the market.  Use the SML equation (i.e., CAPM) to calculate the two companies' required returns.      Bartman   Industries   Reynolds Inc.   Year Stock Price Dividend Holding period return Stock Price Dividend Holding period return 2020 $17.25 $1.15   $48.75 $3.00   2019 14.75 1.06   52.30 2.90   2018 16.50 1.00   48.75 2.75   2017 10.75 0.95   57.25 2.50   2016 11.37 0.90   60.00 2.25   2015 7.62     55.75

Ch 02: Assignment - Risk and Return: Part I CAPM Elements Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock Happy Corp.'s new required rate of return is An analyst believes that inflation is going to increase by 3.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Tool tip: Mouse over the points on the graph Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction. RED RATE OF RETURN (Percent) 20.0 16.0 Value 2.0% 12.0 1.0 8.0 8.0% 7.7% 11.0% 12.1% 25.3% eir coordinates. O New SML

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Question 4 (Risk & Return and Equity Valuation) (a) Donald is considering the merits of two securities. He is interested in the common shares of A Co. and B Inc. The expected monthly rate of return of securities is shown below: State of Affair Probability Boom 0.1 Normal 0.5 Recession 0.4 Stock A Stock B 40% -20% 20% 8% -10% 15% At the time of purchase, the market value is $70/share for A and $50/share for B. Donald plans to invest 10,000 shares of Stock A and 6,000 shares in Stock B. (i)  Compute the portfolio weights of Stock A and Stock B.  (ii)  Compute the expected returns of Stock A and Stock B.  (iii)  Assume that the covariance between Stock A and Stock B is -28%2 (0.0028). Compute the expected rate of return and variance of rate of return of Donald’s portfolio.   (iv)  If the risk-free rate is 2%, the market risk premium is 18% and the beta of Stock A is 0.75, estimate the required and expected rates of return of Stock A. Should Donald invest in Stock A?…

QUESTION 1 Suppose you purchased a stock a year ago. Today, you receive a dividend of $16 and you sell the stock for $99. If your return was 11%, at what price did you buy the stock? QUESTION 2 A stock's risk premium is equal to the: a. risk-free rate plus the expected market risk premium b. expected market risk premium times beta c. expected market return times beta d. treasury bill yield plus the expected market return.

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Risk A1 Q2-1 Question 2. Binomial Model and Option Pricing            The shares of XYZ Inc. are currently selling for $120 per share. The shares are expected to go up by 10 percent or down by 5 percent in each of the following two months (Month 1 and Month 2). XYZ Inc. is also expected to pay a dividend yield of 2 percent at the end of Month 1. The risk-free rate is 0.5 percent per month. What is the value of an American call option on XYZ shares, with an exercise price of $125 and two months to expiration? Use the binomial model to obtain the answer.

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Question 13 You want to buy $16000 worth of shares in Tootsie Roll Industries Inc. on margin, but you only have $6000 of your own money to invest. You will borrow the remainder by short-selling the risk free asset. What is the portfolio weight for the risk free asset? Express your answer in decimal form (not percentage) and round your answer to two decimal places. Answer: 0.63

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