Same average return as the market portfolio

Assignment Help Financial Management

Reference no: EM132066419

DIVERSIFICATION -

(A) You currently own a mutal fund that has a beta of 1 and pays the same average return as the market portfolio. Hoping to lower your risk exposure, you decide to sell the fund and invest all of the proceeds in one stock that has a beta of 0.8. Have you succeeded in lowering your risk exposure? Assume this stock's return is consistent with Capital Asset Pricing Model (CAPM), why is the expected return to this stock is paying too low for the risk it is imposing on you? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM FOR EXCEL).

CAPITAL ASSET PRICING MODEL -

(B) Use Capital Asset Pricing Model (CAPM), to calculate the expected return on a stock that has a beta of 0.25 if the risk-free rate is 3 percent and the market portfolio is expected to pay 11 percent. Why would an investor willingly accept a return that was considerably lower than the expected return on the market portfolio? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM FOR EXCEL).

WEIGHTED AVERAGE COST OF CAPITAL -

(C) Company A has a Weighted Average Cost of Capital (WACC) of 10.6 percent. Company B has a WACC of 12.3 percent. What could explain this difference? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM FOR EXCEL).

Reference no: EM132066419

Questions Cloud

The implication of negative skew in return distribution : What is the implication of negative skew in a return distribution? Under what condition the arithmetic mean and the geometric mean have an equal value?

Total simple interest and the total compound interest : Calcualte the total interest earned, the total simple interest and the total compound interest.

What legal aspect of corporate debt : What legal aspect of corporate debt explains the fact that increasing your company's leverage will make your company's stock beta rise?

Calculate the expected return on stock : Use Capital Asset Pricing Model (CAPM) to calculate the expected return on a stock that has a beta of 2.5

Same average return as the market portfolio : You currently own a mutal fund that has a beta of 1 and pays the same average return as the market portfolio.

Assemble task force to design medication assistance program : You have been invited to assemble a task force to design a medication assistance program.

Calculate the project base-case NPV : Give a table of cash flows with one column for each year’s end. Calculate the project’s base-case NPV at 12/31/X1 assuming it is all-equity financed.

Produce dimple-free and the plant to produce right-way : Give a table of cash flows with one column for each year’s end for the plant to produce Dimple-free and the plant to produce Right-way.

Wages for cleaning laborers : The cost driver for all these resources is "number of times cleaned." Wages for cleaning laborers?

User Account

All Pages