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Greta, an elderly investor, has a degree of risk aversion of A = 4 when applied to return on wealth over a 3-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 3-year strategies. (All rates are annual, continuously compounded.) The S&P 500 risk premium is estimated at 9% per year, with a SD of 18%. The hedge fund risk premium is estimated at 5% with a SD of 25%. The return on each of these portfolios in any year is uncorrelated with its return or the return of any other portfolio in any other year. The hedge fund management claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta believes this is far from certain.
1) Assuming the correlation between the annual returns on the two portfolios is indeed zero, what would be the optimal asset allocation?
Suppose you are the manager and sole owner of a highly leveraged company. All the debt matures in 1 year (there are no intermediate coupons or other debt payments). Express your position payoff as sole shareholder as a function of the value of the as..
Eddy purchased a club membership costing $2,530. He made a down payment of $530 and financed the balance with an installment loan for 48 months. If the payments are $59.27 each month, use Table 13-1 from your text to find the APR.
A firm's bonds have a maturity of 10 years with a $1,000 face value, have an 8% coupon rate paid semi annually, and are callable in 5 years at $1050. They currently sell at a price of $1,100. What is the yield to call? What is the yield to maturity?
Summerdahl Resorts' common stock is currently trading at $40.00 per share. The stock is expected to pay a dividend of $1.25 a share at the end of the year (D1 = $1.25), and the dividend is expected to grow at a constant rate of 5% a year. What is the..
We are evaluating an investment project that will generate cash flows of $25,000. $40,000 and $30,000 in the next three years. The required initial investment is $70,000. Assume that the company is 100% equity finance.
The great, great grandparents of one of your classmates sold their factory to the government 104 years ago for $150,000. If these proceeds had been invested at 6%, how much would this legacy be worth today? Assume annual compounding.
Secolo Corporation stock currently sells for $30 per share. The market requires a return of 11.4 percent on the firm’s stock. If the company maintains a constant 3.7 percent growth rate in dividends, what was the most recent dividend per share paid o..
The risk-free rate of return is 5%, the required rate of return on the market is 10%, and High-Flyer stock has a beta coefficient of 1.5. If the dividend per share expected during the coming year, D1, is $2.50 and g = 4%, at what price should a share..
Common costs- Are fixed costs that are not directly traceable to an individual product line. Normally not avoidable
The Baldwin company has just purchased $40,900, of plant and equipment that has an estimated useful life of 15 years. Suppose at the end of 15 years this plant and equipment can be salvaged for $4,090,000 (1/10th of its original cost.) What will be t..
You have some property for sale and have received two offers. The first offer is for $189,000 today in cash. The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the applicable discount rate is 8. 75%,..
Comment on the difference between net cash provided by operating activities and net income. Speculate on which number is likely to be the better indicator of long-term profitability.
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