need help with 6 and 7 please

Estimated Return Distributions Ferimated Thtal Return QUESTIONS 1. Why is the T-bond return in Table 1 shown to be independent of the state of the economy? Is the return on a l-year T-bond risk-free? 2. Calculate the expected rate of return on each of the four alternatives listed in Table 1. Based solely on expected returns, which of the potential investments appears best? 3. Now calculate the standard deviations and coefficients of variation of returns for the four alternatives. What type of risk do these statistics measure? Is the standard deviation or the coefficient of variation the better measure? How do the altematives compare when risk is considered? (Hint: For the S\&P 500, the standard deviation =16.4%; for Gold Hill, the standard deviation =9.1%.) 4. Suppose an investor forms a stock portfolio by investing $10,000 in Gold Hill and $10,000 in TECO. a. What would be the portfolio's expected rate of return, standard deviation, and coefficient of variation? How does this compare with values for the individual stocks? What characteristic of the two investments makes risk reduction possible? b. What do you think would happen to the portfolio's expected rate of return and standard deviation if the portfolio contained 75 percent Gold Hill? If it contained 75 percent TECO? Use a spreadsheet model for this case to calculate the expected returns and standard deviations for a portfolio mix of 0 percent TECO, 10 percent TECO, 20 percent 1ECO, and so on, up to 100 percent TECO. 5. Now consider a portfolio consisting of $10,000 in TECO and $10,000 in the S&P500 Fund. Would this portfolio have the same risk-reducing effect as the Gold Hill-TECO portfolio considered in Question 4 ? Explain. Use a spreadsheet model to construct a portfolio using 6. Suppose an investor starts with a portfolio consisting of one randomly selected stock. a. What would happen to the portfolio's risk if more and more randomly selected stocks were added? b. What are the implications for investors? Do portfolio effects impact the way investors should think about the riskiness of individual securities? Would you expect this to affect companies' costs of capital? c. Explain the differences between total risk, diversifiable (company-specific) risk, and market risk: d. Assume that you choose to hold a single stock portfolio. Should you expect to be compensated for all of the risk that you bear? 7. Now change Table 1 by crossing out the state of the economy and probability columns and replacing them with Year 1, Year 2, Year 3, Year 4, and Year 5. Then, plot three lines on a scatter diagram which shows the returns on the S\&P 500 (the market) on the X axis and (1) Tbond returns, (2) TECO returns, and (3) Gold Hill returns on the Y axis. What are these lines called? Estimate the slope coefficient of each line. What is the slope coefficient called, and what is its significance? What is the significance of the distance between the plot points and the regression line, i.e., the errors? (Note: If you have a calculator with statistical functions, use linear regression to find the slope coefficients.) 8. Plot the Security Market Line. (Hint: Use Table 1 data to obtain the risk-free rate and the required rate of return on the market.) What is the required rate of return on TECO's stock using Value Line's beta estimate of 0.6 as reported in Figure 1 ? Based on the CAPM analysis, should investors buy TECO stock? 9. What would happen to TECO's required rate of return if inflation expectations increased by 3 percentage points above the estimate embedded in the 8 percent risk-free rate? Now go back to the original inflation estimate, where ks=8%, and indicate what would happen to TECO's required rate of return if investors' risk aversion increased so that the market risk premium rose from 7 percent to 8 percent. Now go back to the original conditions (kpe=8%,RPM=7%) and assume that TECO's beta rose from 0.6 to 1.0. What effect would this have on the required rate of return? 10. What is the efficient markets hypothesis (EMH)? What impact does this theory have on decisions concerning the investment in securities? Is it applicable to real assets such as plant and equipment? What impact does the EMH have on corporate financing decisions? Should Jake Taylor be concerned about the EMH when he considers adding to his staff of security analysts? Explain. Estimated Return Distributions Ferimated Thtal Return QUESTIONS 1. Why is the T-bond return in Table 1 shown to be independent of the state of the economy? Is the return on a l-year T-bond risk-free? 2. Calculate the expected rate of return on each of the four alternatives listed in Table 1. Based solely on expected returns, which of the potential investments appears best? 3. Now calculate the standard deviations and coefficients of variation of returns for the four alternatives. What type of risk do these statistics measure? Is the standard deviation or the coefficient of variation the better measure? How do the altematives compare when risk is considered? (Hint: For the S\&P 500, the standard deviation =16.4%; for Gold Hill, the standard deviation =9.1%.) 4. Suppose an investor forms a stock portfolio by investing $10,000 in Gold Hill and $10,000 in TECO. a. What would be the portfolio's expected rate of return, standard deviation, and coefficient of variation? How does this compare with values for the individual stocks? What characteristic of the two investments makes risk reduction possible? b. What do you think would happen to the portfolio's expected rate of return and standard deviation if the portfolio contained 75 percent Gold Hill? If it contained 75 percent TECO? Use a spreadsheet model for this case to calculate the expected returns and standard deviations for a portfolio mix of 0 percent TECO, 10 percent TECO, 20 percent 1ECO, and so on, up to 100 percent TECO. 5. Now consider a portfolio consisting of $10,000 in TECO and $10,000 in the S&P500 Fund. Would this portfolio have the same risk-reducing effect as the Gold Hill-TECO portfolio considered in Question 4 ? Explain. Use a spreadsheet model to construct a portfolio using 6. Suppose an investor starts with a portfolio consisting of one randomly selected stock. a. What would happen to the portfolio's risk if more and more randomly selected stocks were added? b. What are the implications for investors? Do portfolio effects impact the way investors should think about the riskiness of individual securities? Would you expect this to affect companies' costs of capital? c. Explain the differences between total risk, diversifiable (company-specific) risk, and market risk: d. Assume that you choose to hold a single stock portfolio. Should you expect to be compensated for all of the risk that you bear? 7. Now change Table 1 by crossing out the state of the economy and probability columns and replacing them with Year 1, Year 2, Year 3, Year 4, and Year 5. Then, plot three lines on a scatter diagram which shows the returns on the S\&P 500 (the market) on the X axis and (1) Tbond returns, (2) TECO returns, and (3) Gold Hill returns on the Y axis. What are these lines called? Estimate the slope coefficient of each line. What is the slope coefficient called, and what is its significance? What is the significance of the distance between the plot points and the regression line, i.e., the errors? (Note: If you have a calculator with statistical functions, use linear regression to find the slope coefficients.) 8. Plot the Security Market Line. (Hint: Use Table 1 data to obtain the risk-free rate and the required rate of return on the market.) What is the required rate of return on TECO's stock using Value Line's beta estimate of 0.6 as reported in Figure 1 ? Based on the CAPM analysis, should investors buy TECO stock? 9. What would happen to TECO's required rate of return if inflation expectations increased by 3 percentage points above the estimate embedded in the 8 percent risk-free rate? Now go back to the original inflation estimate, where ks=8%, and indicate what would happen to TECO's required rate of return if investors' risk aversion increased so that the market risk premium rose from 7 percent to 8 percent. Now go back to the original conditions (kpe=8%,RPM=7%) and assume that TECO's beta rose from 0.6 to 1.0. What effect would this have on the required rate of return? 10. What is the efficient markets hypothesis (EMH)? What impact does this theory have on decisions concerning the investment in securities? Is it applicable to real assets such as plant and equipment? What impact does the EMH have on corporate financing decisions? Should Jake Taylor be concerned about the EMH when he considers adding to his staff of security analysts? Explain