Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

As an investor, you are holding the following investments: Stock Amount Invested Beta A $40 million 1.4 B 30 million 1.0 C 60 million 0.8

As an investor, you are holding the following investments:

Stock

Amount Invested

Beta

A

$40 million

1.4

B

30 million

1.0

C

60 million

0.8

You are planning to sell the holdings of Stock B.The money from the sale will be used to purchase another $20 million of Stock A and another $10 million of Stock C.The risk-free rate is 7 percent and the market risk premium is 6.5 percent.How many percentage points higher will the required return on the portfolio be after you complete thi transaction?

(b)Mr. Ahsan is holding a $100 million portfolio that consists of the following six stocks:

Stock

Amount Invested

Beta

A

$10 million

1.4

B

5 million

1.0

C

18 million

0.8

D

13 million

1.2

E

24 million

0.7

F

30 million

1.3

The portfolio has a required return of 13 percent, and the market risk premium is 5.5 percent.Calculate the required return on Stock A, B, C, D, E, and F?

(c)Consider information given in the table below and answers the question asked thereafter:

State

Probability

Return on Stock A

Return on Stock B

A

0.15

10 %

9%

B

0.2

6 %

15%

C

0.05

20 %

10 %

D

0.18

5 %

-8 %

E

0.12

-10 %

20 %

F

0.30

8 %

5 %

i.Calculate expected return on each stock? On the basis of this measure, which stock you will choose?

ii.Calculate standard deviation of the returns on each stock? On the basis of this measure, which stock you will choose? iii. Calculate coefficient of variance of the returns on each stock? On the basis of this measure, which stock you will choose?

iv.Calculate covariance and coefficient of correlation between the returns of the stocks A and B.

v.Now suppose you have $100,000 to invest and you want to a hold a portfolio comprising of $35,000 invested in stock A and remaining amount in stock B. Calculate risk and return of your portfolio.

(d)Firm A reports a Profit Margin of 6.5% and a Total Asset Turnover Ratio of 3.25. Their total asset level is $8,500,000. Assume there are 700,000 shares outstanding and the PE ratio is 11. Also, assume the Return on Equity is 16%. Based on this, calculate the MV/BV ratio.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles of Finance

Authors: Scott Besley, Eugene F. Brigham

5th edition

1111527369, 978-1111527365

More Books

Students also viewed these Finance questions

Question

Where in the hiring process are you?

Answered: 1 week ago

Question

If 2 5 9 - k 5 8 = 2 5 8 , what is the value of k?

Answered: 1 week ago

Question

Contract costing is suitable where the products differ.

Answered: 1 week ago