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The following relate to modern investment theory:
1. Discuss whether each of the following statements are true or false, and provide justification.
(a) A good way to reduce risk is to buy investments that have a high standard deviation of returns’. Comment.
(b) With the right sort of diversification, a portfolio of investments can achieve an expected rate of return that is higher than the highest rate of return expected from any of its individual component investments.
(c) With the wrong sort of diversification, a portfolio of investments might have an expected standard deviation of its rates of return that is higher than the highest standard deviation of returns expected from its individual, component investments.
(d) When the correlation coefficient between two risky investments’ rates of return is positive, the size of the portfolios expected standard deviation of returns will be somewhere between the two standard deviations of the individual component assets. Consequently, the only risk reduction achieved by diversifying cross these two investments is simply through an averaging of the two standard deviations.
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 14 percent, –7 percent, 17 percent, 15 percent, and 10 percent. Suppose the average inflation rate over this period was 1.4 percent and the average T-bil..
What will the price of this stock be 4 years from today if the effective annual discount rate is 16%?
Some derivatives are traded on exchanges; others are traded by financial institutions, fund managers, and corporations in the over-the-counter market, or added to new issues of debt and equity securities. Compare and contrast the different types of e..
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You wish to leave an endowment for your heirs that goes into effect 50 years from today. You don’t want to be forgotten after you pass so you wish to leave an endowment that will pay for a grand soirée yearly and forever. What amount would you like s..
What is your portfolio dollar return and percentage return?
Calculate the Present Value of each of these three Projects.
Investment X offers to pay you $3,700 every year for the next nine years, whereas investment Y offers to pay you $5,500 per year for the next five years. If the interest rate is 6%, which investment has the higher present value?
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