final exam review version 2011(1)

final exam review version 2011(1) - see powerpoint part 2 p...

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Unformatted text preview: see powerpoint part 2 p 73-95 1) a) in mean-variance analysis risk= standard or the dispersion of returns of a security of securities since security 1 has the highest standard and therefore the greatest possible dispe returns it has the most risk b) security 1 has the higest expect return o c) the second two two securities have the lo (ignoring any diversification benefits) the invest in the correlation matrix suggests that two correlation and therefore the highest dive therefore the that supports investing in s if you are risk averse d) return st dev 15 21 10 10 5 4 e) if the correlation of two securities increas flatten and the efficient frontier would sta securities return st dev 10.0% 10.0% 7.5% 5.8% 5.0% 4.0% old correlation 25% return st dev 10.0% 10.0% 7.5% 6.6% 5.0% 4.0% new correlation 75% f) the tendency for correlations to increase as a result the efficient frontier has tende it is more difficult to reduce risk for a give g & h) see shapiro chapter 13 pace presenation part 2 pages 73-95 rd deviation or a portfolio rd deviation (21%) ersion of f 15% per the table lowest standard deviations, so ey would be the two to and three have the lowest ersification benefit securities two and three ses the "bow" in the efficient frontier would 2 4 6 8 10 12 2 4 6 8 10 12 Risk and Return art to approach a "straight line" between the e has reduced the diversification benefit from international investing ed to "come in" be less "bow" shaped and "flatter" -- as a result en level of expected return through international investing 0.04 2.04 4.04 6.04 8.04 10.04 12.04 0.04 2.04 4.04 6.04 8.04 10.04 12.04 Risk and Return 25% correlation see powerpoint part 2 p 73-95 2) a) capm cost of capital equals Rc= Rf + B*(Rm-Rf) where Rc= project cost of capital Rf= risk free rate 1% Rm= market rate 8% B= project beta to the market 3 so Rc = 1% +3*(8%-1%) 22% b) Probability of NOT be 1 2-1000 100% 100% 150 100% 100% 150 100% 100% 650 100% 100% 1200 100% 100% adjusted cash flows c)-1000 1 150 2 150 2 650 3 960 since this is a positive NPV project they sho d) see shapiro 413-426 -- especially 423 see shapiro 379, chapter 11, -- especially p pace presentation part 2 p 88 pace presentation part 2 p 73-95 eing Nationalized in year Probability of NOT be 3 Cash flows 1 2 100% 100%-1000-1000 100% 100% 100% 100% 150 150 100% 100% 100% 100% 150 150 100% 100% 100% 100% 650 650 100% 100% 100% 80% 960 1200 100% 100% discount factor pv adjusted cash flows 100%-1000-1000 0.82 122.95 1 150 0.67 100.78 2 150 0.55 357.96 2 650 0.45 433.34 3 1200 15.03 postive NPV ould invest in it I am using in c the same cost of capital for both projections 442 what would shapiro think of that? That is what d) is addressing in part eing Nationalized in year 3 Cash flows 100% 100%-1000 100% 100% 150 100% 100% 150 100% 100% 650 100% 100% 1200 discount factor pv 100%-1000 0.82 122.95 0.67 100.78 0.55 357.96 0.45 541.68 123.37 postive NPV see powerpoint part 2 p 62-63...
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This note was uploaded on 05/09/2011 for the course FIN 101 taught by Professor Cho during the Spring '08 term at NYU.

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final exam review version 2011(1) - see powerpoint part 2 p...

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