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We are trying to get a sense of how an investor you are advising is trading off risk and return. After several long discussions you come to the conclusion that his level of risk aversion is somewhere between A=3 or 4. A) Draw the indifference curve in risk-return space corresponding to a utility level of 0.05 for an investor with a risk aversion coefficient A=3. Choose standard deviations ranging from 0 to 0.3 in 0.05 steps B) Now draw the indifference curve corresponding to a utility level of 0.05 for an investor with risk aversion coefficient A=4. C) Comparing your answers to part a and b. what do you conclude about the two indifference curves? Particularly, comment on the slope and how this reflects the differences in risk aversion.
You convince your client to think more about how to mix different assets. You first focus on splitting the investment between a broad based index of the US stock market (M) and T-bills. Your analysis tells you that E(rm)=9%, σm=18% . T-bills offer a 2% risk-free rate of return. A) You first take a close look at the investment choices. What is the Sharpe ratio of the market? B)If your investor wanted to achieve an expected return of 8% by mixing by T-bills and the market portfolio M, what fraction y of funds would she invest in the risky asset? C) If your client has risk aversion A=3, what is her optimal investment weight y in the risky asset? What does your client have to do in order to achieve this optional mix of the two assets? D) Due to recent market turmoil following the failure of the US bailout, you update your estimate of future volatility over the next year to σm=24%. What is the new optimal investment weight y?
As a CEO you wish to maximize the productivity of your workers. You are thinking about providing your employees with smartphones so they can be readily available to clients and increase sales.
A company’s normal selling price for its product is $29 per unit. However, due to market competition, the selling price has fallen to $24 per unit. This company's current inventory consists of 290 units purchased at $25 per unit. Replacement cost has..
An 6% semi-annual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 6.8307%. What is the bond's price? Round your answer to the nearest cent.
You want to buy a new sports coupe for $80,500, and the finance office at the dealership has quoted you an APR of 6.2 percent for a 48 month loan to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?
The Wall Street Journal reports that the current rate on 5-year Treasury bonds is 2.45 percent and on 10-year Treasury bonds is 4.55 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a 5-year Treasury bond purchas..
Deng Inc. has a target debt-equity ratio of 0.4. It's before-tax cost of equity is 16 % and it's before-tax cost of debt is 8%. If the tax rate is 32%, what is Deng's WACC?
Explain the problem of using a firm-wide weighted average cost of capital for individual projects AND explain how you would estimate the discount rate for these projects.
Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate and semi annual interest payments. Two years after the bonds were issued the going rate of interest on bonds such as these fell to 6%...
A bond is likely to be called if its coupon rate is below its YTM. A bond is likely to be called if its market price is below its par value. Even if a bond’s YTC exceeds its YTM, an investor with an investment horizon longer than the bond’s maturity ..
Jendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. the company’s weighted average cost of c..
What is the price of a U.S. Treasury bill with 56 days to maturity quoted at a discount yield of 1.20 percent? Assume a $1 million face value. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
The total direct costs of a debt issue, when expressed as a percentage of gross proceeds, tends to do which of the following? Why?
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