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Draw/plot the SML assuming that the risk free rate is 4% and the market earns 12% on average with a variance of 6. Plot asset C such that it has less risk than the market but plots above the SML... Plot asset D such that it has more risk than the market and plotsbeow the SML.. (be sure to indicate where the market portfolio is on your graph.)
(a) Is asset C correctly priced, under priced or overpriced?
(b) If asset C in incorrectly priced, how will it be returned to equilibrium (the SML)?
(c) Similarly, is the asset D correctly priced, underpriced or overpriced?
(d) If asset D is incorrectly priced, how will it be returned to equilibrium (the SML)? be sure to clearly label the graph ( both axes, and all relevant plotted points)
A Treasury bond that matures in 10 years has a yield of 5.75%. A 10-year corporate bond has a yield of 8.75%. Assume that the liquidity premium on the corporate bond is 0.35%. What is the default risk premium on the corporate bond?
Explain why expected return is considered forward-looking. What challenges arise in using expected return? Explain how differences in allocations between the risk-free security and the market portfolio can determine the level of market risk
An investor in the 35% tax bracket may purchase a fifteen year maturity corporate bond that is AA rated. The bond yields 9 percent. The investor may also buy a fifteen year maturity AA rated municipal general obligation bond with a 5.85 percent yi..
When preparing capital budgeting analysis for a new project, Chris Johnson, a chief financial officer at BT Industries, faced a dilemma. The project involved a production of new type of shipping containers, What is the Present Value of this project?
Unlike equities, bond valuation is more complicated by the specific characteristics of the bond itself as outlined in the bond indenture,
Polycorp is about to issue debentures. The following information is available. 1. The coupon rate is 8% pa (or .08). Coupons are paid annually 2. The yield to maturity (YTM) is 0.09 pa 3. The face value is $100 4. The term is 4 years How much can the..
OMG Inc. has 6 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 7,000 bonds.
A convertible bond has a 8 percent coupon, paid semiannually, and will mature in 20 years. If the bond were not convertible, it would be priced to yield 7 percent. The conversion ratio on the bond is 20 and the stock is currently selling for $53 per ..
MU just developed new universal titanium replacement mixer blades. These replacement blades can be used in most mixers currently on the market. MU is selling these blades with a right of return for 30 days. Based on the new guidance on revenue recogn..
Your company has been approached to bid on a contract to sell 4,200 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. How much d..
Do the International Monetary System's policies support or impede the progress of developing economies? Do these policies encourage or discourage investment in these developing economies?
A share of stock is now selling for $105. It will pay a dividend of $7 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 7% and the expected rate of re..
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