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Your friend is facing an important decision. She was recently hired by a large bank, First Global, as a junior associate. Her primary responsibility is reviewing loan applications for completeness and conducting an initial analysis of the credit information. She is very knowledgeable about loans; however, she has come to you with a dilemma. The decision she is facing does not involve a work-related task, rather it involves questions regarding how she should set up her retirement account. She wants to get started investing early in life as she understands the power of compound interest, but she is unclear about where she should allocate her money. She has heard that you have a solid understanding of investments, particularly the risk and return of securities. She has narrowed her options down to three choices and would like your input. The first option is to invest in a mutual fund that is comprised of a wide variety of common stock from large, domestic firms. The second option is to invest in a low-risk government security, such as U.S. Treasury bills (T-bills). The third option is to invest in the common stock of First Global. Your friend is very worried about losing her money and would like to keep her investment choice simple. For that reason she is considering choosing to invest in First Global common stock as she has calculated an average return for the stock that seems acceptable. Currently, your friend has £5,000 to invest.
Your friend likes the idea of holding both the common stock mutual fund and the government security, but she thinks that your suggestion to hold 80% of the former and 20% of the latter is too risky. She mentions that the maximum level of risk she is willing to assume is a portfolio with a standard deviation of 15%. How would you find a combination that meets this requirement? You might want to use Excel to solve this problem, but you should provide the equation(s) showing your calculations of the weights of each security and the expected return. You should also explain to your friend in plain English the approach you are following here.
You are considering a $495,000, 15 year, monthly amortizing price level adjusted mortgage (PLAM) at 3% real interest rate. The inflation in first 5 years is expected to be at 4%, in the next 5 years at 5%, and in the final five years at 2%. Develop a..
Mutually exclusive project occur when
Computing annuity payment: John Harper has borrowed $17,400 to pay for his new truck. The annual interest rate on the loan is 9.4 percent, and the loan needs to be repaid in four payments. What will be his annual payment if he begins his payment begi..
She sold all stocks today for $43.53. During that period the stock paid dividends of $1.02 per share. What is Mary’s effective annual rate?
If the Federation uses a straight line depreciation method, what will the book value of the fusion drive be at the end of year 2158 (Year 4)?
Calculate the weighted average cost of capital using book value weights. Calculate the weighted average cost of capital using market value weights.
South Central Airlines (SCA) operates a commuter flight between LAX and Denver. calculate the total revenue and the total cost of overbooking.
You will receive $5,000 per year, every year for the next five (5) years, beginning at the end of this year. If you use 6% as your discount rate, calculate the present value of this annuity.
What is the net income for this firm?
Read the article entitled: Net Operating Working Capital Behavior: A First Look (Hill, M.D, Kelly, G.W., Highfield, M.J. (2014). The results of their research suggested that operating and finance conditions should be considered when evaluating capita..
Assuming the correlation between the annual returns on the two portfolios is indeed zero, what would be the optimal asset allocation?
Assume the risk free rate equals Rf = 4%, and the expected return on the market portfolio is E [RM] = 12% and standard deviation σM = 15%. What is the equilibrium market risk premium (that is, the expected return on the market portfolio minus the ris..
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