Question
(a) Suppose you are considering investing toward a down payment on your house. You received investment rates from two banks. Bank A offers 9.0% compounded
(a) Suppose you are considering investing toward a down payment on your house. You received investment rates from two banks. Bank A offers 9.0% compounded quarterly and Bank B offers 9.5% compounded semiannually? Show which Bank has the more attractive investment rate.
(b) Your investment advisor recommended two stocks to include in your portfolio: Stock A and Stock B. Seventy percent of your funds are invested in Stock A and 30% in Stock B. Some financial numbers on the stocks are shown in the table below.
Security | Return | Standard deviation |
Stock A | 19% | 22% |
Stock B | 10% | 14% |
Correlation between stocks = 0.3 |
Using the given information, calculate the expected return and the standard deviation on the portfolio. [9 marks]
(c) You plan on buying a truck in 5 years time. The truck will cost $600,000 at that time. If you want to make five equal deposits at the end of each year, and if your account earns 9% compounded annually, how much must you invest at the end of each year to accumulate your goal of $600,000?
(d) Suppose you have an investment that recorded the following returns over the last several years: 9.5%, 3.8%, 4.7%, 6.9%, 12.3%. Calculate the arithmetic and geometric average of the returns on your investment.
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