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Questions and Answers of Finance

Calculate the expected return on a portfolio of 45 percent Roll and 55 percent Ross by filling in the followingtable:
Calculate the volatility of a portfolio of 65 percent Roll and 35 percent Ross by filling in the followingtable:
Based on the following information, calculate the expected return and standard deviation for the twostocks.
Consider the following information:a. Your portfolio is invested 25 percent each in A and C, and 50 percent in B. What is the expected return of the portfolio?b. What is the variance of this
Fill in the missing information in the following table. Assume that Portfolio AB is 30 percent invested in StockA.
Given the following information, calculate the expected return and standard deviation for a portfolio that has 45 percent invested in Stock A, 35 percent in Stock B, and the balance in StockC.
Use the following information to calculate the expected return and standard deviation of a portfolio that is 40 percent invested in 3 Doors, Inc., and 60 percent invested in DownCo.:
In the previous question, what is the standard deviation if the correlation is +1? 0? – 1? As the correlation declines from + 1 to – 1 here, what do you see happening to portfolio volatility? Why?
In Problem 12, what are the expected return and standard deviation on the minimum variance portfolio?
Fill in the missing information assuming a correlation of.15.
Consider two stocks, Stock D with an expected return of 13 percent and a standard deviation of 39 percent and Stock I, an international company, with an expected return of 16 percent and a standard
What are the expected return and standard deviation of the minimum variance portfolio in the previous problem?
Asset K has an expected return of 15 percent and a standard deviation of 41 percent. Asset L has an expected return of 6 percent and a standard deviation of 10 percent. The correlation between the
The stock of Bruin, Inc., has an expected return of 14 percent and a standard deviation of 57 percent. The stock of Wildcat Co. has an expected return of 12 percent and a standard deviation of 42
You have a three-stock portfolio. Stock A has an expected return of 12 percent and a standard deviation of 41 percent, Stock B has an expected return of 16 percent and a standard deviation of 58
You are going to invest in Asset J and Asset S. Asset J has an expected return of 14 percent and a standard deviation of 49 percent. Asset S has an expected return of 10 percent and a standard
Suppose two assets have perfect positive correlation. Show that the standard deviation on a portfolio of the two assets is simply:(P = xA × (A + xB × (B
Suppose two assets have perfect negative correlation. Show that the standard deviation on a portfolio of the two assets is simply:(P = ± (xA × (A – xB × (B)
Using the result in Problem 23, show that whenever two assets have perfect negative correlation it is possible to find a portfolio with a zero standard deviation.What are the portfolio weights?
Derive our expression in the chapter for the portfolio weight in the minimum variance portfolio. (Danger! Calculus required!)
In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of
Suppose the government announces that, based on a just completed survey, the growth rate in the economy is likely to be 2 percent in the coming year, compared to 5 percent for the year just
Classify the following events as mostly systematic or mostly unsystematic. Is the distinction clear in every case?a. Short-term interest rates increase unexpectedly.b. The interest rate a company
Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.'s stock to change price.a. The government announces that inflation
As indicated by examples in this chapter, earnings announcements by companies are closely followed by, and frequently result in, share price revisions. Two issues should come to mind. First, earnings
Suppose you identify a situation in which one security is overvalued relative to another. How would you go about exploiting this opportunity? Does it matter if the two securities are both overvalued
Explain what it means for all assets to have the same reward-to-risk ratio. How can you increase your return if this holds true? Why would we expect that all assets have the same reward-to-risk ratio
Dudley Trudy, CFA, recently met with one of his clients. Trudy typically invests in a master list of 30 securities drawn from several industries. After the meeting concluded, the client made the
You own 400 shares of Stock A at a price of $60 per share, 500 shares of Stock B at $85 per share, and 900 shares of Stock C at $25 per share. The betas for the stocks are 1.2, .9, and 1.6,
A share of stock sells for $53 today. The beta of the stock is 1.2, and the expected return on the market is 12 percent. The stock is expected to pay a dividend of $1.10 in one year. If the
A stock has a beta of 1.2 and an expected return of 14 percent. A risk-free asset currently earns 5 percent.a. What is the expected return on a portfolio that is equally invested in the two
Asset W has an expected return of 10.5 percent and a beta of .9. If the risk-free rate is 6 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
Stock Y has a beta of 1.25 and an expected return of 14 percent. Stock Z has a beta of .70 and an expected return of 9 percent. If the risk-free rate is 6 percent and the market risk premium is 7
Using the CAPM, show that the ratio of the risk premiums on two assets is equal to the ratio of their betas.
Suppose you observe the following situation:Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-freerate?
Show that another way to calculate beta is to take the covariance between the security and the market and divide by the variance of the market’s return.
Fill in the following table, supplying all the missing information. Use this information to calculate the security€™sbeta.
You have $100,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 13
Consider the following information on Stocks I and II:The market risk premium is 8 percent, and the risk-free rate is 5 percent. Which stock has the most systematic risk? Which one has the most
The beta for a certain stock is 1.15, the risk-free rate is 5 percent, and the expected return on the market is 13 percent. Complete the following table to decompose the stock€™s return
John Wilson, a portfolio manager, is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 5 percent, the expected return on
Assuming Grace keeps the ABC stock, calculate the expected return of the new portfolio, the covariance of ABC stock with the original portfolio, and the expected standard deviation of the new
If Grace sells the ABC stock, she will invest the proceeds in risk-free government securities yielding .42 percent monthly. Calculate the expected return of the new portfolio, the covariance of the
Determine whether the beta of Grace's new portfolio, which includes the government securities, will be higher or lower than the beta of her original portfolio. Justify your response with one reason.
Based on a conversation with her husband, Grace is considering selling the $100,000 of ABC stock and acquiring $100,000 of XYZ Company common stock instead. XYZ stock has the same expected return
You are given the following information concerning a stock and the market:Calculate the average return and standard deviation for the market and the stock. Next, calculate the correlation between the
Explain the difference between the Sharpe ratio and the Treynor ratio.
What is a common weakness of Jensen's alpha and the Treynor ratio?
Explain the relationship between Jensen's alpha and the security market line (SML) of the capital asset pricing model (CAPM).
What is one advantage and one disadvantage of the Sharpe ratio?
What is meant by a Sharpe-optimal portfolio?
What is the relationship between the Markowitz efficient frontier and the optimal Sharpe ratio?
Explain the meaning of a Value-at-Risk statistic in terms of a smallest expected loss and the probability of such a loss.
A portfolio has an annual variance of .1064. What is the standard deviation over a two-month period?
The weekly standard deviation of a stock is 6.48 percent. What is the monthly standard deviation? The annual standard deviation?
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset:What is the Sharpe ratio, Treynor ratio, and Jensen€™s alpha for
What is the probability that a normal random variable is less than one standard deviation below its mean?
What are the probabilities that a normal random variable is less than n standard deviations below its mean for values of n equal to 1.645, 1.96, 2.326?
The probabilities that a normal random variable X is less than various values of x are 5 percent, 2.5 percent, and 1 percent. What are these values of x?
DW Co. stock has an annual return mean and standard deviation of 11 percent and 34 percent, respectively. What is the smallest expected loss in the coming year with a probability of 5 percent?
Woodpecker, Inc., stock has an annual return mean and standard deviation of 15 percent and 39 percent, respectively. What is the smallest expected loss in the coming month with a probability of 2.5
Your portfolio allocates equal funds to the DW Co. and Woodpecker, Inc., stocks referred to in the previous two questions. The return correlation between DW Co. and Woodpecker, Inc., is zero. What is
The stock of Metallica Bearings has an average annual return of 15 percent and a standard deviation of 43 percent. What is the smallest expected loss in the next year with a probability of 1 percent?
Osbourne, Inc., stock has an annual mean return of 16 percent and a standard deviation of 53 percent. What is the smallest expected loss in the next week with a probability of 2.5 percent?
Your portfolio is equally weighted between Metallica Bearings and Osbourne, Inc., stocks in the previous two questions. The return correlation between the two stocks is zero. What is the smallest
What is the formula for the Sharpe ratio for a stock and bond portfolio with a zero correlation between stock and bond returns?
What is the formula for the Sharpe ratio for an equally weighted portfolio of stocks and bonds?
What is the formula for the Sharpe ratio for a portfolio of stocks and bonds with equal expected returns, i.e., E(RS) = E(RB), and a zero return correlation?
A stock has an annual return of 13 percent and a standard deviation of 58 percent. What is the smallest expected loss over the next year with a probability of 1 percent? Does this number make sense?
For the stock in the previous problem, what is the smallest expected gain over the next year with a probability of 1 percent? Does this number make sense? What does this tell you about stock return
Tyler Trucks stock has an annual return mean and standard deviation of 12 percent and 32 percent, respectively. Michael Moped Manufacturing stock has an annual return mean and standard deviation of
Using the same return means and standard deviations as in the previous question for Tyler Trucks and Michael Moped Manufacturing stocks, but assuming a return correlation of –.5, what is the
Your portfolio allocates equal amounts to three stocks. All three stocks have the same mean annual return of 16 percent. Annual return standard deviations for these three stocks are 30 percent, 40
Using the same return means and standard deviations as in the previous question for the three stocks, but assuming a correlation of .2 among returns for all three stocks, what is the smallest
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 12 percent and 15 percent, respectively. The standard deviations of the assets are 29
You are constructing a portfolio of two assets. Asset A has an expected return of 10 percent and a standard deviation of 21 percent. Asset B has an expected return of 15 percent and a standard
During the year, the Senbet Discount Tire Company had gross sales of $1.2 million. The firm's cost of goods sold and selling expenses were $450,000 and $225,000, respectively. Senbet also had notes
Analyze the difference between a firm's financial vs. operating leverage. Could you define them and state their differences?
Discuss different costs of internal and external financing?
Compute the present value of interest tax shields generated by these three debt issues. Consider corporate taxes only. The marginal tax rate is T = 0.35.a. A $1000, one-year loan at 8%.b. A five-year
Last year, you purchased a stock at a price of $51.50 a share. Over the course of the year, you received $1.80 per share in dividends and the annual inflation rate averaged 2.6 percent. Today, you
Diet for you paid an annual dividend of $1.18 a share last month. The company is planning on paying $1.50, $1.75, and $1.80 a share over the next 3 years, respectively. After that, the dividend will
You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per year for Years 6-8, and $2,000 per years for Years 9-10. If you require a 10 percent
What is the expected return and beta of your portfolio using the following data:Market risk premium = 8 percentRisk-free rate = 4 percentBeta of XYZ = 1.5; Beta of PDQ = 2.0Investment in XYZ
How long will it take you to save an adequate amount for retirement if you deposit $2,500 per quarter year into an account beginning today that’s pays an effective annual rate (EAR) of 4 percent if
Why are financial markets important to the health of the economy?
When interest rates rise, how might businesses and consumers change their economic behavior?
How can a change in interest rates affect the profitability of financial institutions?
How can changes in foreign exchange rates affect the profitability of financial institutions?
What are the other important financial intermediaries in the economy besides banks?
Why do managers of financial institutions care so much about the activities of the Federal Reserve System?
Calculate the present value of a $1,000 zero-coupon bond with five years to maturity if the yield to maturity is 6%.
A lottery claims its grand prize is $10 million, payable over 20 years at $500,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of
Consider a bond with a 7% annual coupon and a face value of $1,000. Complete the following table.What relationships do you observe between maturity and discount rate and the currentprice?
Consider a coupon bond that has a $1,000 par value and a coupon rate of 10%. The bond is currently selling for $1,150 and has eight years to maturity. What is the bond’s yield to maturity?
You are willing to pay $15,625 now to purchase a perpetuity that will pay you and your heirs $1,250 each year, forever, starting at the end of this year. If your required rate of return does not
What is the price of a perpetuity that has a coupon of $50 per year and a yield to maturity of 2.5%? If the yield to maturity doubles, what will happen to its price?
Property taxes in DeKalb County are roughly 2.66% of the purchase price every year. If you just bought a $100,000 home, what is the PV of all the future property tax payments? Assume that the house
Assume you just deposited $1,000 into a bank account. The current real interest rate is 2%, and inflation is expected to be 6% over the next year. What nominal rate would you require from the bank
A 10-year, 7% coupon bond with a face value of $1,000 is currently selling for $871.65. Compute your rate of return if you sell the bond next year for $880.10.

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