PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 7, Problem 11PS
Summary Introduction
To discuss: The reason why investment L is safer for diversified investor.
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Consider a position consisting of a $65,080 investment in Shin’s Korean Technology (SHIT) and a $22,210 investment in Coca-Cola Company (KO). Suppose that the daily volatilities of these two assets are 2.14% and 2.71% respectively and that the coefficient of correlation between their return is 0.4168. With an assumption that it follows the normally distributed returns, the 32-day 95% Value at Risk (VaR) for Shin’s Korean Technology (SHIT) is closest to
A.
$16,620.41.
B.
$14,816.56.
C.
$12,958.76.
D.
$10,007.37.
Anjelo Jonathan a financial analyst for Blues Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Anjelo’s research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment X had a market value of $20,000; investment Y had a market value of $55,000. During the year, investment X generated cash flow of $1,500 and investment Y generated cash flow of $6,800. The current market values of investments X and Y are $21,000 and $55,000, respectively.
A.) Calculate the expected rate of return on investments X using the most recent year’s data. (Format: 11.11%)B.) Calculate the expected rate of return on investments Y using the most recent year’s data. (Format: 11.11%)C.) Assuming that the two investments are equally risky, which one should Anjelo recommend? (Investment X or Investment Y)
4. Consider a position consisting of a $50,000 investment in onions and a $80,000 investment in rubber bands. Suppose that the per annum volatilities of these two assets are 25% and 15%, respectively, and that the coefficient of correlation between their returns is -0.4. What is the 5-day 97.5% VaR and ES for the portfolio? By how much does diversification reduce the VaR? Assume jointly normally distributed returns.
Chapter 7 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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