Cash Flow and Risk Free Asset Essay
a. Straight voting? 80
b. Cumulative voting? 80*10 = 800
2. “If the efficientmarket hypothesis is true, the pension fund manager might as well select a portfolio by throwing darts at the Wall Street Journal.” Explain why this is not so. (10 points) This strategy does not consider risk.
3. The NuPress Valet Company has an improved version of its hotel stand. The investment cost is expected to be 72 million dollars and will return 13.50 million dollars for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the …show more content…
6. Use the probability distribution to answer the following questions: (30 points) Return on Return on
State Prob Security A Security B Boom .6 15% 8% Bust .4 5% 20% Expected Return 11% 12.8% Standard Deviation 4.9% 5.88%
a. What is the expected return on Security B? 12.8%
b. What is the expected return on a portfolio that is 40% invested in A and 60% invested in B? 12.08%
c. What is the standard deviation of Security A? 4.9%
d. What is the expected return on a portfolio that is equally split among A, B and the risk free asset? The expected return on the risk free asset is 4%. 9.27%
(11+12.8+4)/3
e. What is the covariance between A and B? 28.8%%
Cov = .6(1511)(812.8)+.4(511)(2012.8)
f. What is the standard deviation of a portfolio with weights of .25 in security A and the remainder in security B? 3.2%
Portfolio Standard Deviation = .252(4.9)2+.752(5.88)2+2*.25*.75*(28.8)
Or = .6(9.7512.35)2+.4(16.2512.35)2
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