# Finance Week 2 Essay

746 Words Nov 28th, 2011 3 Pages
Jamie Lyons
Finance
W2

4-1 Questions

Annuity-A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.

Lump-sum payment- A one-time payment for the total or partial value of an asset.

Cash flow- A revenue or expense stream that changes a cash account over a given period

Uneven cash flow stream- Any series of cash flows that doesn’t conform to the definition of an annuity is considered to be an uneven cash flow stream.

4-1 problem

Solve for FV
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K.

The beta coefficient is a measure of a stock’s market risk, or the extent to which the returns on a given stock move with the stock market.

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b average stock’s beta- is equal to 1

6-1

0.8 + 1.4 = 2.2
2.2/ 2 = 1.10
1.12

6-2

k = RF + Beta(Market return - RF)

.06 + .7(.13 - .06) = 10.90%

10.90%

6-3

Required Return = Risk free Return + Beta*(Market Risk Premium)
5+1.0(6)=11%
5+1.2(6)= 12.2%

6-4

(0.1*-.5) + (0.2*-.05)+(0.4*.16)+(0.2*.25)+(0.2*.06)=0.114
11.4%
expected return= 11.40%

square root of [0.1(-.5)squared] +
[0.2(-.05)squared]+[0.4(.16)squared]+[0.2(.25)squared]+[0.2(.06)squared]
standard deviation= 26.69%

26.69% divided by 11.4 = .2669 divided by .114 coefficient of variation-= 2.34

6-9
|Stock |Investment |Beta |w |
|A |\$400,000 |1.50 |10.00% |
|B |\$600,000 |-0.50 |15.00% |
|C |\$1,000,000 |1.25 |25.00% |
|D |\$2,000,000 |0.75 |50.00% |