Question

FIN 500: Case Study 1 Assignment

Don't use plagiarized sources. Get Your Custom Essay on

Everest University FIN 500: Case Study 1 Assignment

Just from $13/Page

Notes

Your first case assignment deals with the concepts of risk and return. Please read the case questions through and give some thought to your answers before you commence. Answer all parts of the ten (10) questions presented below. Your report should be well-organized, type-written/word processed, and independently prepared. Each student’s report must be his/her own original work and the write-up must also be individually prepared.

1. Buxton Corporation is planning to invest in a security that has several potential rates of return. Using the following probability distribution of returns during different states of the economy, what is the expected rate of return on this investment? In addition, compute the standard deviation of the returns (?). Finally, briefly explain what these numbers represent.

Probability

Expected Return

0.10

-10%

0.20

5%

0.30

10%

0.40

25%

2. Using the capital asset pricing model (CAPM), estimate the appropriate required rate of return for the following three stocks, assuming that the risk-free rate (rRF) is 5 percent and the expected return for the market (rM) is 17 percent.

Stock

Beta (?)

A

0.75

B

0.90

C

1.40

3. Based on the following table of actual (or ex post) returns for both Inquiry Corporation and the market from 2007 through 2010, calculate the average return and the standard deviation for both Inquiry and the market (keep in mind that this data is historical and not based on a probability distribution, so be sure to use the correct formulas).

Year

Inquiry Corporation

Market

2007

4%

2%

2008

6%

3%

2009

0%

1%

2010

2%

-1%

4.

(a) Derive the expected return (rP) and beta (?P) for a portfolio based on the following information:

Stock

Percentage of Portfolio

Beta (?)

Expected Return

1

40%

1.00

12%

2

25%

0.75

11%

3

35%

1.30

15%

(b) Given the information in the table above, present the equation for the security market line and explain where the return for this specific portfolio would lie (plot) relative to the SML (i.e., below or above the line). Assume that the risk-free rate (rRF) is 8 percent and that the expected return on the market portfolio (rM) is 12 percent.

5. Reliable Printing is evaluating a security. One-year Treasury bills (rRF) are currently paying 3.1 percent. Calculate the following investment’s expected return and its standard deviation (?). Should Reliable Printing invest in this security? Briefly explain.

Probability

Expected Return

0.15

-1%

0.30

2%

0.40

3%

0.15

8%

6. You have researched the common stock of two companies (A and B) and have compiled the following information:

COMPANY A COMPANY B

Probability

Return

Probability

Return

0.20

-2%

0.10

4%

0.50

18%

0.30

6%

0.30

27%

0.40

10%

0.20

15%

Calculate the expected return, standard deviation (?), and the coefficient of variation (CV) for each stock and, based on the CV, which stock should you invest in? Briefly explain.

7. Assume you own a portfolio consisting of the following stocks:

Stock

Percentage of Portfolio

Beta (?)

Expected Return

1

20%

1.00

16%

2

30%

0.85

14%

3

15%

1.20

20%

4

25%

0.60

12%

5

10%

1.60

24%

(a) Determine the expected return on your portfolio.

(b) Determine the portfolio beta (?P).

(c) Given the portfolio beta and the assumptions that the risk-free rate (rRF) is 7 percent and the expected return on the market portfolio (rMKT) is 15.5 percent, present the equation for the security market line (SML).

(d) Based on your equation for the SML and the expected returns from the data in the table, which stocks appear to be winners (i.e., underpriced) and which stocks appear to be losers (i.e., overpriced)?

8. The common stock for a particular company is known to have a beta (?) of 1.20. The expected return on the market (rM) is 9 percent and the risk-free rate (rRF) is 5 percent.

(a) Compute a fair rate of return based on this information.

(b) What would be a fair rate of return if the beta were 0.85?

(c) What would be a fair rate of return if the expected return on the market increased to 12 percent and the beta remained at 0.85?

9. The expected return for the general market (rMKT) is 12.8 percent, and the market risk premium (i.e., RPM) is 4.3 percent. Moe, Larry, and Curley have betas of 0.82, 0.57, and 0.68, respectively. What are the required rates of return for the three securities?

10. Hickory Stick’s common stock has a beta (?) of 0.95. The expected return for the market (rM) is 7 percent and the risk-free rate (rRF) is 4 percent.th

(a) What is the required rate of return based on this information?

(b) What would be the required rate of return if the beta were 1.25?

11. An exhaustive financial analysis has produced the following returns on two investments under three different scenarios:

Expected Returns

Scenario

Probability

Stock X

Stock Y

S1

0.3

10%

8%

S2

0.4

16%

15%

S3

0.3

12%

20%

(a) Calculate the expected return on each investment.

(b) Calculate the standard deviations (?) for both X and Y.

(c) Calculate the coefficient of variation (CV) for both X and Y.

(d) If you were to create a portfolio consisting of 67% of Stock X and 33% of Stock Y, what will be the expected return (rP) and the standard deviation (?P) for your portfolio?

Why Work with Us

Top Quality and Well-Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.

Professional and Experienced Academic Writers

We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.

Free Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.

Prompt Delivery and 100% Money-Back-Guarantee

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.

Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.

24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.

Essays

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.

Admissions

Admission Essays & Business Writing Help

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.

Reviews

Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.

Reviews

Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.