International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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When comparing the forward hedge to the options hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty.
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What are the advantages of evaluating fund performance based on Internal Rate of Return (IRR)? Why would an investor prefer to evaluate a fund based on a cash-on-cash return?
The decision tree below describes a “sure thing” investment and a “risky” investment. Use backward induction to evaluate which is the better investment. Assume all values are already given in present value terms.
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- Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the plotted CML. Now add a set of indifference curves and illustrate how an investors optimal portfolio is some combination of the risky portfolio and the risk-free asset. What is the composition of the risky portfolio?arrow_forwardWhen comparing NPV and IRR, which is incorrect? With NPV, the discount rate can be adjusted to take into account increased risk and the uncertainty of cash flows With IRR, cash flows can be adjusted to account for risk NPV can be used to compare investments of various size or magnitude Both NPV and IRR can be used for screening decisionsarrow_forwardWhen comparing the performance of two investment alternatives, which characteristicsof investments do you need to know? Please explain how you use those characteristics in making yourinvestment decision.arrow_forward
- Explain the following three variables which influence the overall rate of return on alternative investments: The real risk-free rate of return The nominal risk-free rate of return The risk premium on the investmentarrow_forwardTo determine an optimal portfolio of investments when the available choices are divisible, the investment choices should first be ranked in increasing order based on which of the following? a. FW b. Initial investment c. IRR d. PWarrow_forwardWhat is a benchmark and why is there a need to compare the fund's return vis-a-vis a benchmark?arrow_forward
- An advantage of the internal rate of return method is that a.it considers the time value of money. b.it can rank proposals of equal lives. c.it considers the cash flows of the investment. d.All of these choices are correct.arrow_forwardIn the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________. the level of the security market line the slope of the security market line the difference between the beta and the risk-free rate the risk-free ratearrow_forwardWhich of the following discounts future cash flows to their present value at the expected rate of return, and compares that to the Initial Investment? A. internal rate of return (IRR) method B. net present value (N PV) C. discounted cash flow model D. future value methodarrow_forward
- When using the NPV method for a particular investment decision, if the present value of all cash Inflows Is greater than the present value of all cash outflows, then _______ . A. the discount rate used was too high B. the investment provides an actual rate of return greater than the discount rate C. the investment provides an actual rate of return equal to the discount rate D. the discount rate is too lowarrow_forwardDiscuss the different approaches used by Fama and French (1992) and Bali, Brown and Tang (2017) in controlling other pricing factors in the cross-section of returns. Which approach is more suitable for constructing investment portfolio in real time setup? Please explain your answerarrow_forwardIf you knew that you can invest in a passive index fund, at a low cost, and capture all the returns of the market index, would that affect your opinion of the effectiveness of a strategy using technical analysis or fundamental analysis?arrow_forward
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