Chpt - JustAnswer
Chpt. 10
2. EXCEL: The table below shows the one-year teturn distribution of Startup Inc. Calculate
a. The expected return
b. The standard deviation of the return.
Return Probability
-100% 40%
-75% 20%
-50% 20%
-25% 10%
1000% 10%
a. [pic]
b. [pic]
[pic]
13. Consider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both types of firms, there is a 60% probability that the firm will have a 15% return and a 40% probability that the firms will have a -10% return. What is the volatility (standard deviation) of a portfolio that consists of an equal investment in 20
a. Types S firms?
b. Types I firms?
a. [pic]
[pic]
Because all S firms in the portfolio move together there is no diversification benefit. So the standard deviation of the portfolio is the same as the standard deviation of the stocks—12.25%
b. [pic]
[pic]
Type I stocks move independently. Hence the standard deviation of the portfolio is
[pic]
19. Suppose the market portfolio is equally likely to increase b 30% or decrease by 10%.
a. Calculate the beta of a firm that goes up on average by 43% when the market goes up and goes down by 17% when the market goes down.
b. Calculate the beta of a firm that goes up on average by 18% when the market goes down and goes down by 22% when the market goes up.
c. Calculate the beta of a firm that is expected to go up by 4% independently of the market.
a. [pic]
b. [pic]
c. A firm that moves independently has no systemic risk so Beta = 0
22. Suppose the market risk premium is 6.5% and the risk-free interest rare is 5%. Calculate the cost of capital of investing in a project with a beta of 1.2
[pic]
(12). You are a risk-averse investor who is considering investing in one of two economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together-in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent-one stock increasing in price has no effect on the prices of other stocks. Which economy would you choose to invest in ? EXPLAIN
A risk-averse investor would choose the economy in which stock returns are independent because this risk can be diversified away in a large portfolio.
Chapter 11
4. EXCEL: Using the data in the following table, estimate (a) the average return and volatility for each stock, (b) the covariance between the stocks, and (c) the correlation between these two stock.
Realized Returns
Year StockA Stock B
1998 -10% 21%
1999 20% 30%
2000 5% 7%
2001 -5% -3%
2002 2% -8%
2003 9% 25%
a.
[pic]
b.
[pic]
c. [pic]
20. Kaui Surf Boards is seeking to raise capital from a large group of investors to expand its operations. Suppose these investors currently hold the S&P 500 Portfolio, which has a volatility of 15% and an expected return of 10%. The investment is expected to have a volatility of 30% and a 15% correlation with the S&P 500. If the risk-free investment is 4%, what is the appropriate cost of capital for Kaui Surf Board’s expansion?
[pic]
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