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Greta, an elderly investor, has a degree of risk aversion of A = 3 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 10% per year, with a SD of 24%.
The hedge fund risk premium is estimated at 8% with a SD of 38%. 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.
Using an annual correlation of 0.3, calculated the standard deviation of the rate of return on this investment if you have a project that has a 0.7 chance of doubling your investment in a year and a 0.3 chance of halving your investment in a year.
(Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)
Standard deviation ________??
State the Modigliani Miller Proposition I (MM I) on Capital Structure. Explain the proposition using your own words.
New company has perpetual preferred stock outstanding that sells for $40 share and pays dividend of $2.50 at end of each year what is Required rate of return.
Interest payments paid to common stockholders are more tax beneficial to a corporation than are payments to creditors.
what is the present value of the cash flow in year 2?
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Microbiotics currently sells all of its frozen dinner’s cash on delivery but believes it can increase sales by offering supermarkets 1 month of free credit. The price per carton is $160, and the cost per carton is $95. The unit sales will increase fr..
Assume that if interest rates fall the bonds will be called What coupon rate should the bonds have in order to sett at par value?
You own a portfolio that has $2,300 invested in Stock A and $3,300 invested in Stock B. If the expected returns on these stocks are 8 percent and 11 percent, respectively, what is the expected return on the portfolio?
Assume debt and common equity each represent 50 percent of the firm’s capital structure. Compute the weighted average cost of capital.
Mom’s Cookies, Inc., is considering the purchase of a new cookie oven. What will the cash flows for this project be?
ABC is trying to determine its optimal capital structure. The Company’s capital structure consists of debt and common stock.
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