Finance Questions

between A and B is equal to 0.35. Assume asset A and asset B are combined into a portfolio with the

The table below shows the equity betas for the firms presented in the case (using Jan-92 to Dec-96 equal weight NYSE/AMEX/NASDAQ as market portfolio):

1. You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5?

The lower the risk that is associated with an investment, that investment usually has a potential for lower returns. Conversely, if there are high levels of risk associated with an investment, and in turn a potential for a higher return.

d. What is the required return for an asset with a Beta of 2.0 based on your equation in 1c above (Calculate it below, and plot it on the graph above; Does the graph confirm your calculation?)?

Interest rate risk the price of the bonds changes because of the increase and decrease of the interest rates.

Risk free rate + Equity Beta * (Expected return on market - Risk free rate)

We know that the term structure of interest rates describes the relationship between short and long term interest rates. What is important to understand when reading this article is to remember that the yield curve does not always have to be upward sloping. The rates on long term securities are only above short term rates if the yield curve is upward sloping or "normal." This is not always the case; depending on the expectations of the market the yield curve can also be "abnormal" or inverted if short term rates are expected to be higher than that of long term interest rates. It is also possible to have a humped yield curve if interest rates on medium securities are expected to be higher than both short and long term securities.

Using the same market risk premium and risk free rate (5.5% & 4.62% respectively) given in the case, the averaged beta of 1.40, the pretax cost of debt of 7.65%, and the weighted average of debt & equity, the products & systems

loss aversion, that is the tendency to strongly avoid losses, even at the cost of foregoing gains (Kahneman, Knetsch & Thaler, 1991);

Using CAPM: Risk Free Rate = 6%; Market Risk Premium = 5%; Beta = 1.2

The yield curve is a graph that plots the yields of similar-quality bonds against their maturities, ranging from shortest to longest. The relationship between yield and maturity is referred to as the term structure of interest rates. The Treasury yield curve is the base or benchmark for pricing bonds and setting yields in other areas of the debt market. Moreover, the shape of the yield curve is constructed from U.S Treasury strips which are zero-coupon

Risk is when there is an opportunity for a return on an investment that will be not the same as anticipated. When investing in an investment instrument, there are risks and the level of risk differs contingent on specific investment, the source of risk also is subject to the investment. The economy can be a change where the investments can be changed and can drastically increase or decrease. Investment returns is the total amount that can be earned or lost in any investment. Risk and return are essentially connected. The relationship between risk and return is the higher the risk there is a possibility of a larger return. The relationship of risk and return is by quantities of investment. Between the higher risk and the lower risk is a return that rises with an increase in risk. The high potential for returns is when there is lower risk (Kinicki, Cornett, Adair, Nofsinger, 2016).

Finally, when the expected return up to 10 percent, it will result an undiversified and higher risk portfolio whereby dependent based on the higher risk financial assets.

Market Risk. Also known as systematic risk, this is a potential for the entire market to decline. A fall in prices of stocks or periods of below-average performance in the stock market or due to specific conditions that effect particular industries or issues will result losing money on your investment.