Determining the market risk premium

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Question 1

You are involved in a project that requires an immediate investment in Net Working Capital (NWC) of $10,000. At the end of the year the level of NWC is expected to be $12,000. At the end of year two it is expected to be $5,000. How much is the inflow/outflow due to NWC in time 0, 1, and 2. Clearly identify the amount and state whether it is an inflow or an outflow.

Question 2

Stock A has an expected return of 17%, its beta is 1.5, and the risk-free rate is 5%. What must be the market risk premium? Useful to know:

R j   = R f   + b( Rm - R f )

Question 3

Project "git 'er done" has the following cash flows over its lifetime:

Year 0

- $15,000

Years 1, 2, 3, 4, and 5

$4,700 Each

Assuming a discount rate of 12%, find:

a) The payback period

b) The discounted payback period

c) The Net Present Value

d) The approximate IRR

e) The Profitability Index.

Question 4

You decide to hold a portfolio with 80% invested in the S&P 500 stock index and 20% invested in the MSCI Emerging Markets index. The expected return is 9.93% for the S&P 500 and 18.20% for the Emerging Markets index. The risk (i.e. standard deviation) is 16.21% for the S&P 500 and 33.11% for the Emerging Markets index. What will be the portfolio's expected return and risk given that the covariance between the two indexes is 0.5% (i.e. 0.005)?

Reference no: EM13853305

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