1) Suppose you have $20,000 in cash to invest. You decide to short sell $10,000 worth...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1) Suppose you have $20,000 in cash to invest. You decide to short sell $10,000 worth of Coca Cola stock and invest the proceeds from your short sale, plus your $20,000, in Intel. At the end of the year, you decide to liquidate your portfolio. If the two stocks have the following realized returns, what is the return on your portfolio ? Intel Coca cola 25.00 40.00 Div1 + P1 31.50 42.40 2) What are the portfolio weights corresponding to a short sale? Return 26 % 6% 3) Suppose Intel stock has a volatility of 50%, Coca Cola stock has a volatility of 25% and the stocks are uncorrelated. What is the volatility of a portfolio that is short $10,000 of Coca Cola and long $30,000 of Intel ? 4) Suppose that you have $10,000 in cash and you decide to borrow another $10,000 at a 5% interest rate to invest in the stock market. You invest the entire $20,000 in portfolio Q with a 10% expected return and a 20% volatility. What is the expected return and volatility of your investment ? What is your realized return if Q goes up 30% over the course of the year? What return do you realize if Q falls by 10% over the course of the year? 5) Your uncle calls and asks for investment advice. Currently, he has $100,000 invested in Portfolio P. This portfolio has an expected return of 10.5% and a volatility of 8%. Suppose the risk-free rate is 5%, and the tangent portfolio has an expected return of 18.5% and a volatility of 13%. To maximize your uncle's expected return without increasing his volatility, which portfolio would you recommend? If your uncle prefers to keep his expected return the same but minimize his risk, which portfolio would you recommend ? 6) You are currently invested in the Omega Fund, a broad-based fund that invests in stocks and other securities with an expected return of 15% and a volatility of 20%, as well as in risk-free Treasuries paying 3%. Your broker suggests that you add a real estate fund to your current portfolio. The real estate fund has an expected return of 9%, a volatility of 35%, and a correlation of 0.10 with the Omega Fund. Will adding the real estate fund improve your portfolio ? 7) Alphatec is seeking to raise capital from a large group of investors to expand its operations Suppose the S&P 500 portfolio is the efficient portfolio of risky securities (so that these investors have holdings in this portfolio). The S&P 500 portfolio has a volatility of 15% and an expected return of 10%. The investment is expected to have a volatility of 40% and a 50% correlation with the S&P 500. If the risk-free interest rate is 4%, what is the appropriate cost of capital for Alphatec's expansion ? 8) Assume that the risk-free rate, RFR is 5%; the expected rate of return on the market, E(RM), is 11%; and that the standard deviation of returns on the market portfolio, SD(MP) is 20%. Calculate the expected return and standard deviation of returns for portfolios that are 25%, 75% and 125% invested in the market portfolio. We will use RM to represent these portfolio weights. 9) The standard deviation of the return on the market index is estimated as 20%. If Asset A's standard deviation is 30% and its correlation of returns with the market index is 0.8, what is Asse A's beta? If the covariance of Asset A's returns with the returns on the market index is 0.048, what is the beta of Asset A? 10) The expected return on the market is 15%, the risk-free rate is 8%, and the beta for Stock A is 1.2. Compute the rate of return that would be expected (required) on this stock. 11) Acme, Inc., has a capital structure that is 40% debt and 60% equity. The expected return on the market is 12%, and the risk-free rate is 4%. What discount rate should an analyst use to calculate the NPV of a project with an equity beta of 0.9 if the firm's after-tax cost of debt is 5%? 12) The following figure contains information based on analyst's forecasts for three stocks. Assume a risk-free rate of 7% and a market return of 15%. Compute the expected and required return on each stock, determine whether each stock is undervalued, overvalued, or properly valued, and outline an appropriate trading strategy. Stock A B Price today $25 40 15 E(Price) in 1 year $27 45 17 E(dividend) in 1 year $1.00 2.00 0.50 Beta 1.0 0.8 1.2 1) Suppose you have $20,000 in cash to invest. You decide to short sell $10,000 worth of Coca Cola stock and invest the proceeds from your short sale, plus your $20,000, in Intel. At the end of the year, you decide to liquidate your portfolio. If the two stocks have the following realized returns, what is the return on your portfolio ? Intel Coca cola 25.00 40.00 Div1 + P1 31.50 42.40 2) What are the portfolio weights corresponding to a short sale? Return 26 % 6% 3) Suppose Intel stock has a volatility of 50%, Coca Cola stock has a volatility of 25% and the stocks are uncorrelated. What is the volatility of a portfolio that is short $10,000 of Coca Cola and long $30,000 of Intel ? 4) Suppose that you have $10,000 in cash and you decide to borrow another $10,000 at a 5% interest rate to invest in the stock market. You invest the entire $20,000 in portfolio Q with a 10% expected return and a 20% volatility. What is the expected return and volatility of your investment ? What is your realized return if Q goes up 30% over the course of the year? What return do you realize if Q falls by 10% over the course of the year? 5) Your uncle calls and asks for investment advice. Currently, he has $100,000 invested in Portfolio P. This portfolio has an expected return of 10.5% and a volatility of 8%. Suppose the risk-free rate is 5%, and the tangent portfolio has an expected return of 18.5% and a volatility of 13%. To maximize your uncle's expected return without increasing his volatility, which portfolio would you recommend? If your uncle prefers to keep his expected return the same but minimize his risk, which portfolio would you recommend ? 6) You are currently invested in the Omega Fund, a broad-based fund that invests in stocks and other securities with an expected return of 15% and a volatility of 20%, as well as in risk-free Treasuries paying 3%. Your broker suggests that you add a real estate fund to your current portfolio. The real estate fund has an expected return of 9%, a volatility of 35%, and a correlation of 0.10 with the Omega Fund. Will adding the real estate fund improve your portfolio ? 7) Alphatec is seeking to raise capital from a large group of investors to expand its operations Suppose the S&P 500 portfolio is the efficient portfolio of risky securities (so that these investors have holdings in this portfolio). The S&P 500 portfolio has a volatility of 15% and an expected return of 10%. The investment is expected to have a volatility of 40% and a 50% correlation with the S&P 500. If the risk-free interest rate is 4%, what is the appropriate cost of capital for Alphatec's expansion ? 8) Assume that the risk-free rate, RFR is 5%; the expected rate of return on the market, E(RM), is 11%; and that the standard deviation of returns on the market portfolio, SD(MP) is 20%. Calculate the expected return and standard deviation of returns for portfolios that are 25%, 75% and 125% invested in the market portfolio. We will use RM to represent these portfolio weights. 9) The standard deviation of the return on the market index is estimated as 20%. If Asset A's standard deviation is 30% and its correlation of returns with the market index is 0.8, what is Asse A's beta? If the covariance of Asset A's returns with the returns on the market index is 0.048, what is the beta of Asset A? 10) The expected return on the market is 15%, the risk-free rate is 8%, and the beta for Stock A is 1.2. Compute the rate of return that would be expected (required) on this stock. 11) Acme, Inc., has a capital structure that is 40% debt and 60% equity. The expected return on the market is 12%, and the risk-free rate is 4%. What discount rate should an analyst use to calculate the NPV of a project with an equity beta of 0.9 if the firm's after-tax cost of debt is 5%? 12) The following figure contains information based on analyst's forecasts for three stocks. Assume a risk-free rate of 7% and a market return of 15%. Compute the expected and required return on each stock, determine whether each stock is undervalued, overvalued, or properly valued, and outline an appropriate trading strategy. Stock A B Price today $25 40 15 E(Price) in 1 year $27 45 17 E(dividend) in 1 year $1.00 2.00 0.50 Beta 1.0 0.8 1.2
Expert Answer:
Answer rating: 100% (QA)
1 Return on portfolio Amount invested in Intel Increase in value of Intel Amount received from short sale of Coca Cola Amount needed to close short position 30000 126 10000106 10000140 37800 10600 140... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
1. Cristobal reports the following income and loss: Salary $125,000 Interest Income from CNP Bank 3,000 Income from activity A 39,000 Loss from activity B (20,000) Loss from activity C (40,000)...
-
final project milestone. Identify 5 different elements of each statement (Balance Sheet, Income Statement and Cash Flow Statement) and compare and contrast your findings. For example The Balance...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
A utilization greater than one suggests that the mean service time is higher than the mean inter-arrival time. True False QUESTION 3 It costs five times more money to retain a current customer than...
-
If a manufacturer (the vendee) buys all items of a particular type from a particular vendor, the manufacturer is practicing sole sourcing (Schonberger and Knod, Operations Management, 2001). As part...
-
It is said that Galileo discovered a basic principle of the pendulum that the period is independent of the amplitudeby using his pulse to time the period of swinging lamps in the cathedral as they...
-
Outsourcing qualitative considerations (Learning Objectives 1, 6) Refer to U.S. Food in S8-11. What qualitative factors should Gonzalez consider before making a final decision?
-
Earnings management entails managers using judgment and reporting estimates in such a way as to alter reported earnings to their favor. a. Discuss the three factors that must be estimated in...
-
Write a letter to the Smith's discussing the results of their tax return, remind them of any deduction substantiation rules they need to follow (receipts, mileage log, etc.), offer suggestions for...
-
Holman Electronics manufactures audio equipment, selling it through various distributors. Holmans days sales outstanding (Accounts receivable/Average daily credit sales) figures increased steadily in...
-
Bandar Industries Berhad of Malaysia manufactures sporting equipment. One of the company's products, a football helmet for the North American market, requires a special plastic. During the quarter...
-
What are the disadvantages of using a common currency. Be certain that your answer is related to the West African situation but you may refer back to the Eurozone or other African common currencies...
-
Suppose that RFS corporation has issued debt with a book value of $18 million and has issued equity with a book value of $30 million. However, the market value of the firm is only $15 million now...
-
Last year, the State Board of Education in the State of Jefferson made some changes in the prescribed history curriculum in its public schools. In the "New History Curriculum," all American history...
-
The face value of a $ 1 6 , 0 0 0 note is discounted for 6 0 days at 1 0 % . . What is the discount amount?
-
There are several methods of capital budgeting, which one of them is most commonly applied and why? Rationalize your stance
-
View Policies Show Attempt History Current Attempt in Progress Novak Corporation needs to set a target price for its newly designed product M14-M16. The following data relate to this new product. Per...
-
By referring to Figure 13.18, determine the mass of each of the following salts required to form a saturated solution in 250 g of water at 30 oC: (a) KClO3, (b) Pb(NO3)2, (c) Ce2(SO4)3.
-
The U.S. population is approximately 300 million. Using the information in Table 2.1, calculate the average amount of U.S. currency per citizen. Do most Americans hold that much cash? If not, where...
-
Suppose the growth rate of potential output rises. The behavior of the output gap (the fluctuations of output around potential) does not change. Do NBER recessions become more or less common? Explain.
-
Suppose company A has a stable stock price. The price is not likely to change much in the next year. Company B has an uncertain stock price: it could either rise or fall by a lot. Would you pay more...
-
Use of mean and standard deviation The Oyster Pearl Restaurant is popular with sea- food fanciers who like its large variety of oyster dishes. The oysters are a high-profit item but sales fluctuate...
-
Central tendency and dispersion Vixen Valve Works has been producing a new mechani- cal gas valve on two automated production lines in a pilot plant. Each production line was acquired from a...
-
Use of means and standard deviations Kosh Tour Travel Agency uses two 70-passenger buses for its organized tours. Daily revenues vary considerably on the Devil's Hole tour and appear to be much more...
Study smarter with the SolutionInn App