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CHAPTER 7 UNIT 5 – CORPORATE FINANCE
12. Your eccentric Aunt Claudia has left you $50,000 in Alcan shares plus $50,000 cash.
Unfortunately her will requires that the Alcan stock not be sold for...CHAPTER 7 UNIT 5 – CORPORATE FINANCE
12. Your eccentric Aunt Claudia has left you $50,000 in Alcan shares plus $50,000 cash.
Unfortunately her will requires that the Alcan stock not be sold for one year and the
$50,000 cash must be entirely invested in one of the stocks shown in Table 7.8. What is
the safest attainable portfolio under these restrictions?
13. There are few, if any, real companies with negative betas. But suppose you found
one with ___.25.
a. How would you expect this stock’s rate of return to change if the overall market rose
by an extra 5 percent? What if the market fell by an extra 5 percent?
b. You have $1 million invested in a well-diversified portfolio of stocks. Now you receive
an additional $20,000 bequest. Which of the following actions will yield the
safest overall portfolio return?
i. Invest $20,000 in Treasury bills (which have _ _ 0).
ii. Invest $20,000 in stocks with _ _ 1.
iii. Invest $20,000 in the stock with ___.25.
Explain your answer.
CHAPTER 8 Practice Questions 3a, 8b, c, d, e, and 11
3. Mark Harrywitz proposes to invest in two shares, X and Y. He expects a return of 12
percent from X and 8 percent from Y. The standard deviation of returns is 8 percent for
X and 5 percent for Y. The correlation coefficient between the returns is .2.
a. Compute the expected return and standard deviation of the following portfolios:
Portfolio
1
2
3

Percentage in X
50
25
75

Percentage in Y
50
75
25

8. The Treasury bill rate is 4 percent, and the expected return on the market portfolio is
12 percent. Using the capital asset pricing model:
a. Draw a graph similar to Figure 8.7 showing how the expected return varies with beta.
b. What is the risk premium on the market?

c. What is the required return on an investment with a beta of 1.5?

d. If an investment with a beta of .8 offers an expected return of 9.8 percent, does it
have a positive NPV?
e. If the market expects a return of 11.2 percent from stock X, what is its beta?
11. Percival Hygiene has $10 million invested in long-term corporate bonds. This bond
portfolio’s expected annual rate of return is 9 percent, and the annual standard deviation
is 10 percent.
Amanda Reckonwith, Percival’s financial adviser, recommends that Percival consider
investing in an index fund which closely tracks the Standard and Poor’s 500 index.
The index has an expected return of 14 percent, and its standard deviation is 16
percent.
a. Suppose Percival puts all his money in a combination of the index fund and Treasury
bills. Can he thereby improve his expected rate of return without changing the
risk of his portfolio? The Treasury bill yield is 6 percent.

b. Could Percival do even better by investing equal amounts in the corporate bond
portfolio and the index fund? The correlation between the bond portfolio and the index
fund is _.1.

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