Based on the
correlations between A and B, and A and C, which of the two portfolios
has the strongest diversification effect?
Consider the
following 3 stocks, A, B, and C. There is a 30% chance that the economy
will go into a recession (R), 20% that is stay neutral (N), and 50% chance
that there will be an economic upswing (U). Your estimates about the returns
on the individual stocks is as follows:
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Calculate the
expected return for stock A, B, and C.
Calculate the
standard deviation for stock A, B, and C.
Calculate the
covariance and correlation coefficient between stock A and B.
Calculate the
covariance and correlation coefficient between stock A and C.
What is the
expected return on a portfolio with 50% invested in stock A and 50% in
stock B?
What is the
expected return on a portfolio with 50% invested in stock A and 50% in
stock C?
What is the
risk (standard deviation) of a portfolio with 50% invested in stock A and
50% in stock B?
What is the
risk (standard deviation) of a portfolio with 50% invested in stock A and
50% in stock C?
Based on the
correlations between A and B, and A and C, which of the two portfolios
has the strongest diversification effect?
Use the
SML or CAPM relation to find the expected return on a portfolio consisting
of 5 different types of stock, and T-bills. Stock A has a beta of 1.9,
stock B has a beta of 1.6, stock C has a beta of 0.8, stock D has a beta
of -0.1, and finally, stock E has a beta of 2.8. You have invested 15%
of your money in each of these stocks and the remainder is invested in
T-bills. The return on a well-diversified market portfolio is 13%, and
the return on T-bills is 4%. What is the expected return on your portfolio?
You have a portfolio
with 3 different sorts of assets. Half your money is invested in IBM, which
has a beta of 1.4, and 35% of your money is invested in a small software
IPO, with a beta of 4.6. The rest is invested in risk free securities,
returning 2% per year. The market risk premium is equal to 11%, what is
the expected return on your portfolio?
You have half
your money invested in GM. The other half of your money is invested in
Ford, which has an expected return of 11%. The beta of your portfolio is
1.2, the expected return on the market portfolio is 11%, and the return
on T-bills is 1%. What is the beta for GM? What is the expected return
for GM?
Suppose UPS
has 30-year bonds outstanding, with 1 year left to maturity. The bonds
carry a 20% coupon rate, and have a face value of $1,000. The current market
price for these bonds is $869. The tax rate is 34%, what is the after-tax
cost of debt for UPS?
UPS also just
paid out a dividend of $15, which is expected to grow indefinitely at 6%.
The current stock price of UPS is $68, what is the cost of equity for UPS?
If the market
risk premium is 16%, and the risk free rate of return is 3%, what is the
equity beta for UPS?
If UPS has a
target Debt-to-Equity ratio of 0.50, what is the WACC for UPS?
If UPS has a
new target, with 10% equity and 90% debt in their capital structure, what
is the WACC in this case?