Question
1. What is the expected standard deviation of the returns of a portfolio that is invested 25 percent in Stock A, 40 percent in Stock
1. What is the expected standard deviation of the returns of a portfolio that is invested 25 percent in Stock A, 40 percent in Stock B, and the remainder invested in Stock C? (Hint: create a column showing the distribution of returns for the portfolio. Then, find the portfolio's expected return and variance as normally done for a single asset.)
State of Economy | Probability | Return of A | Return of B | Return of C | |||
Boom | 0.20 | 29% | 15% | 6% | |||
Normal | 0.50 | 11% | 12% | 13% | |||
Slow Down | 0.20 | 0% | 8% | 25% | |||
Recession |
| -10% | 5% | 30% | |||
| A. | 3.21 percent | |||||
| B. | 1.55 percent | |||||
| C. | 7.69 percent | |||||
| D. | 11.71 percent | |||||
2.
The returns on the common stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to return 46 percent in comparison to 16 percent in a normal economy and a negative 28 percent in a recessionary period. The probability of a recession is 25 percent while the probability of a boom is 30 percent. What is the standard deviation of the returns on this stock?
| A. | 21.42 percent |
| B. | 27.39 percent |
| C. | 38.11 percent |
| D. | 32.48 percent |
|
| 3. |
The outstanding bonds of Tech Express are priced at $1,092 and mature in 10 years. These bonds have a face value of $1,000, a coupon rate of 7.68 percent, and pay interest annually. The firm's tax rate is 21 percent. What is the firm's after tax cost of debt?
| A. | 5.06 percent |
| B. | 7.68 percent |
| C. | 4.81 percent |
| D. | 6.40 percent |
|
| 4. |
The Timken Company has announced a rights offer to raise $18 million for a new journal. The stock currently sells for $51 per share and there are 2.4 million shares outstanding. The subscription price is set at $45 per share. What is the ex-rights price per share?
| A. | $50.14 |
| B. | $58.12 |
| C. | $53.72 |
| D. | $48.17 |
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