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Unformatted text preview: AFE 2206 Tutorial 1. Week 3 Questions Chapter 1 Question 7, p.31 of the textbook Problems 1, 5, 12 pp.31-33 Chapter 3 Question 2, p.99 Chapter 4 Question 2, p.133 Problem 1, p. 133 Chapter 5 Question 1, p.159 Problem 1, p.160 Answers Chapter 1 Question 7, p.31 of the textbook 7. An investors required rate of return is a function of the economys risk free rate (RFR), an inflation premium that compensates the investor for loss of purchasing power, and a risk premium that compensates the investor for taking the risk. The RFR is the pure time value of money and is the compensation an individual demands for deferring consumption. More objectively, the RFR can be measured in terms of the long-run real growth rate in the economy since the investment opportunities available in the economy influence the RFR. The inflation premium, which can be conveniently measured in terms of the Consumer Price Index, is the additional protection an individual requires to compensate for the erosion in purchasing power resulting from increasing prices. Since the return on all investments is not certain as it is with T-bills, the investor requires a premium for taking on additional risk. The risk premium can be examined in terms of business risk, financial risk, liquidity risk, exchange rate risk and country risk. Problem 1, p.31 19.1% .191 1- 1.191 1- HPR HPY 191 . 1 34 50 . 40 34 1.50 39 Investment of Value Beginning Flows) Cash (including Investment of Value Ending HPR . 1 = = = = = = + = = Problem 5, p.32 By this measure, B would be preferable By this measure, T would be preferable. 5513 . 3 016 . 05682 . CV 123 . 2 054 . 11466 . CV Return Expected Deviation Standard Variation of t Coefficien c). ( 5 B T = = = = = 016 . 5 .08 5 ) 04 (. ) 02 (. ) 09 . ( ) 03 (. ) 08 (. AM 054 . 5 .27 5 ) 15 (. ) 03 . ( ) 12 . ( ) 08 (. ) 19 (. AM n HPY (AM) Mean c Arithemeti a). ( 5 B T i n 1 i = = + +- + + = = = +- +- + + = = = =- = n 1 i 2 i i i )] E(R R [ P ) ( Deviation Standard 5(b)....
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This note was uploaded on 06/09/2009 for the course ACCOUNTING 1203AFE taught by Professor Ms.mirellamalin during the Three '08 term at Griffith.
- Three '08