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The following questions relate to modern portfolio theory:
1. Assume the rates of return for shares A and B have a perfect, negative correlation (i.e. coefficient -1). If their respective expected rates of return are 10% and 12% for the relevant investment period, and standard deviation of rates of return estimated to be 15% and 25% respectively, calculate what proportions of your money should be invested into assets A and B (i.e. calculate the asset weightings) to achieve a portfolio that has an expected zero risk.
2. Your research has indicated a particular portfolio of shares has weekly returns that are normally distributed, with a mean rate of return of 0.25% (i.e. 0.25 of one percent) and standard deviation of 0.50%. What is the dollar value of the possible loss that we are 99% confident will not be exceeded over a given week, assuming the portfolio investment amount is $100,000.
Calculate the expected value of the short-term interest rate and calculate expected profit under each of the financial manager's three proposed financing plans
You own a stock portfolio invested 15 percent in Stock Q, 33 percent in Stock R, 40 percent in Stock S, and 12 percent in Stock T. The betas for these four stocks are 1.4, .5, 1.5, and .8, respectively. What is the portfolio beta? What is the beta o..
University Corp. issued five-year bonds that pay a coupon of 6.5 percent semi annually. The current market rate for similar bonds is 5.5 percent. How much will you be willing to pay for University's bond today?
The bond pays interest semiannually and matures in twelve years. If the par value is $1,000, then what is the current bond price?
Stone & Co. bonds are selling at 95, yielding 5.25%, let's assume that yields increase by 25bps, causing the price to decline to 93. How much has the price changes, in percentage? Now let's assume that yields decrease by 25 bps, causing the price to ..
A preferred stock is paying $6 per annum and is callable after 7 years. The yields for similar instruments are 8%. Derive the price of the preferred stock. What is its price, if it is not callable?
What is the yield to maturity of this bond?
What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?
Muncy, Inc., is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cash flows of $814,322, $863,275, $937,250, $1,018,610, $1,212,960, and $1,225,000 over the next six years. If the appropriate disco..
At year-end 2013, Wallace Landscaping’s total assets were $1.8 million and its accounts payable were $450,000. Sales, which in 2013 were $2.1 million, are expected to increase by 20% in 2014. Total assets and accounts payable are proportional to sale..
A 20-year 10% annual coupon bond has a par value of $1, 000. When you originally purchased this bond, the effective annual interest rate was 8%. Suppose that five years after purchase, the effective annual interest rate is 10.5%. What is the absolute..
Phillip's Manufacturing wants to raise $15 million to open a new production center. The company estimates the issue costs including the legal and accounting fees will be $530,000. The underwriters have set the stock price at $23 a share and the under..
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