b) Each assets average rate of return based on the historical annual data provided. (2 points) c) Pepsi and Coca Colas standard deviation and coefficient of variation. (2 points) d) Comment on the risk and return for each asset based on your answers to 2 and 3 above. (3 points) e) The required return for each asset. (2 points) f) A recommendation on investing in which the two assets, giving reasons for your recommendation. (2 points) g) Comment on the use of standard deviation as oppose to the use of CAPM as a risk measurement. (3 points) (Maximum 16 points) Q2 Young Corporation is considering the following investments. The current rate on Treasury Bills is 2.5% and the expected return for the market is 9%. Stock Beta K 1.12 G 1.3 B 0.75 U 1.02 a) Using the CAPM, what rate of return should Young Corporation require for each individual security? (4 points) b) How would your evaluation of the expected rates of return for Young Corporation change if the risk-free rate was to rise to 4.5% and the market risk premium was to be only 5%? (3 points) c) Which market risk premium scenario (from [a] or [b] above) best fits a recessionary environment? A period of economic expansion? Explain your response using a graph which plots the expected return (y-axis) and the beta (x-axis). (5 points) (Maximum 12 points) Q3 a) Two investors are evaluating Novabanks stock for possible purchase. They agree on the expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the riskiness of the stock. However, one investor normally holds stocks for 2 years, while the other normally holds stocks for 10 years. On the basis of the type of analysis you have done on stock valuation, they should both be willing to pay the same price for Novabanks stock. True or false? Explain your answer. (5 points) b) Investors in Company As stock, currently selling for $26.25, were paid a dividend of $2.00 last year and are expected to receive a dividend of $2.10 this year. Company Bs stock on the other hand sells for $67.00, paid a dividend of $3.00 last year and is expected to pay a dividend of $3.24 at the end of this year. Your friend Joan is trying to decide which stock to invest in, she requires a 13% return on her investment. Based on your knowledge of stock valuation how would you advise Joan? (4 points) c) Explain why preferred stocks are referred to as hybrid securities. Why are they generally less risky than common stocks? (3 points) (Maximum 12 points) Q4 The definition of insiders in insider trading can be ambiguous. While the CEO is an insider, it is unclear whether the biggest supplier for a firm can be considered an insider. Research the case of Pillsbury Company and the Minneapolis attorney James OHagan and discuss the implications of this case for the theory of insider trading. (Maximum 10 points) Peer Review (Maximum 5 points) End of Assignment Grading Matrix Q1 /16 Q2 /12 Q3 /12 Q4 /10 Peer Review /5 Total /55