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Investment Portfolio You know that there is a trade-off between risk and return when you choose an investment. The greater the return you expect to receive, the larger the risk you must take. Most people cannot afford to risk much of their money on investments that offer a high return. This, however, does not mean that they must accept only low returns on their investments. Through diversification, a fair return can be achieved without taking unreasonable risks. Asset allocation is the process of choosing a variety of investments that offers different combinations of risk and return. Then, if one investment fails to do well, others may make up for its poor performance by being successful. The objective for each investor is to select a portfolio of investments that meets his or her individual financial goals. Your cousin, Maya (28 years) and her husband, Peter (32 years), have very different views when it comes down to investments. Peter wants to save some money for a down payment on a house and wants to put all their money in bank accounts, whereas Maya wants to put all their money into growth stocks so that they can accumulate the money faster. They are seeking your advice. What would you suggest them to do and why? (Use vocabulary – asset allocation, rule of 72, time factor, age, types of stocks, bonds, treasury securities, mutual funds)
what would be the possible maximum percentage return on the investor's funds (excluding commissions)? What would have been the return if the investor had not bo
Consider the following data for a one-factor economy. Would an arbitrage opportunity exist? If so, what would be the arbitrage strategy?
A company sold a $920,000 issue of bonds with a 13-year life, paying 3% interest per year. The bonds were sold at par value. If the company paid a selling fee of $50,000 and has an annual expense of $69,904 for mailing and record keeping, what is the..
What is the project's net present value if the required rate of return is 15 percent?
At year-end 1998, Acme Inc. had total assets of $300 million, and sales for 1998 were $900 million. The company has a 33.33% debt to total assets ratio. Sales for 1999 are expected to increase by 25%. Assuming constant asset turnover and leverage, an..
Candy Store now stands and the federal government intends to take Candy Store's property to build that highway.
Consider the following information for three stocks, A, B, and C. The stocks’ returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1. The risk-free rate is 5%, and the market is..
Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 19.83%, with interest paid monthly, what is the card's EFF%? State your answer as a percentage to 2 d..
Suppose you enter into a short 6-month forward position at a forward price of $60. What is the payoff in 6 months for prices of $50, $55, $60, $65, and $70? Suppose you buy a 6-month put option with a strike price of $60. What is the payoff in 6 mont..
Before investing in a project, managers have the opportunity to calculate present value of a project to determine how much is being offered for the annuity. We too have the same opportunity to calculate whether an invest will generate positive ret..
In order to replicate the payoff of your two call options at the expiration date that you selected, how many shares of stock should you buy today, and how much should you borrow at the risk-free rate? Calculate and explain.
LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company acce..
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