Reference no: EM132257963 , Length: 1500 Words
Corporate Finance Assignment -
Answer the following 4 Questions.
Question 1: Suppose you invest $20,000 by purchasing 200 shares of ABC at $50 per share, 200 shares of LMN at $30 per share, and 100 shares of XYZ at $40 per share. Moreover, suppose over the next year XYZ has a return of 12.5%, LMN has a return of 20%, and ABC has a return of -10%.
a) Calculate the weight of the three stocks in your portfolio.
b) Calculate the return on your portfolio over the year.
c) Calculate the value of your portfolio over the year.
d) Calculate the weight on each of the three stocks in your portfolio after one year.
e) Critically discuss the following statement: "It is the covariance not the correlation that is important in the mean-variance model for portfolio selection."
Question 2: Consider the following sample returns:
|
Year End
|
Stock X Realized Return
|
Stock Y Realized Return
|
Stock Z Realized Return
|
|
2004
|
20.1%
|
-14.6%
|
0.2%
|
|
2005
|
72.7%
|
4.3%
|
-3.2%
|
|
2006
|
-25.7%
|
-58.1%
|
-27.0%
|
|
2007
|
56.9%
|
71.1%
|
27.9%
|
|
2008
|
6.7%
|
17.3%
|
-5.1%
|
|
2009
|
17.9%
|
0.9%
|
-11.3%
|
a) Calculate the mean return, variance and standard deviation of each stock. Which stock would you choose and why?
b) Calculate the covariance and correlation between each of the three stocks.
c) Calculate the expected return on a portfolio made of 30% X, 30% Y and 40% Z.
d) Calculate the standard deviation on a portfolio made of 30% X, 30% Y and 40% Z.
e) Based on the information given above assume you are able to change the distribution of the three stocks in the portfolio by decreasing your investment in Z from 40% to 10% and the remaining 30% can be invested in either X or Y but not in both.
i) Which stock would you choose, to get the highest possible return?
ii) Which stock would you choose to get the lowest possible risk?
f) Critically discuss the difference between traditional portfolio management and modern portfolio theory.
Question 3: Company XYZ has three projects, use the information in the table below to:
|
Project
|
Asset Beta
|
Next Period's Expected Free Cash Flow ($mm)
|
Expected Growth Rate
|
|
T1
|
1.4
|
450
|
4.0%
|
|
T2
|
1.1
|
525
|
2.5%
|
|
T3
|
0.8
|
600
|
3.0%
|
The risk-free rate of interest is 3% and the market risk premium is 5%.
a) Calculate the cost of capital of the three projects.
b) Calculate the Value of the 3 projects.
c) Calculate the overall value of the company XYZ.
d) Calculate the overall asset beta for XYZ.
e) John knows that there are informed traders in the stock market, but John is uninformed. You are John's investment analyst. Recommend an investment strategy that guarantees that John will not lose money to the informed traders and explain to him why it works.
Question 4: Read the article "Is capitalism worth saving?"
After reading the article critically discuss the reasons given by Steven Pearlstein on why have so many people, lost faith in capitalism? [1000-1500 words].
Attachment:- Assignment File.rar