fin422 final cheat 4-5-11

# fin422 final cheat 4-5-11 - ght ed average cost of...

This preview shows pages 1–2. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ght ed average cost of capital? .09 = [We × .11] + [(1 - We) × .05) = .11We + .05 - .05We; .04 = .06We; We = 66.67%; Wd = 1 - We = 10 You just sold 200 shares of Langley, Inc. stock at a price of \$38.75 a share. Last year you paid \$41.50 a share to buy this stock. Over the course of the year, you received dividends totaling \$1.64 per share. What is your capital gain on this investment? Capital gain = (\$38.75 - \$41.50) × 200 = -\$550 (capital loss) What are the arithmetic and geometric average returns for a stock with annual returns of 4%, 9%, -6%, and 18%? b. 6.25%; 5.89% Arithmetic average = (.04 + .09 - .06 + .18) ÷ 4 = 6.25%; Geometric return = (1.04 × 1.09 × .94 × 1.18).25 - 1 = 5.89% A stock with an actual return that lies above the security market line: has yielded a higher return than expected for the level of risk assumed. You have a \$1,000 portfolio which is invested in stocks A and B plus a risk-free asset. \$400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7 How much needs to be invested in stock B if you want a portfolio beta of .90? Beta Portfolio = .90 = (\$400 ÷ \$1,000 × 1.3) + (\$x ÷ \$1,000 × .7) + ((\$600 - x) ÷ \$1,000 × 0) = .52 + .0007x + 0; .0007x = .38; x = \$542.86 = \$543 You have a portfolio of two risky stocks which turns out to have no diversification benefit. The reason you have no diversification is the returns: d. move perfectly with one another. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%? E(r) A = .036 + [.85 × (.105 - .036)] = .095 E(r) B = .036 + [1.08 × (.105 - .036)] = .111 E(r) C = .036 + [1.69 × (.105 - .036)] = .153 Stock C is correctly priced. E(r) D = .036 + [.71 × (.105 - .036)] = .085 E(r) E = .036 + [1.45 × (.105 - .036)] = .136 Stock Beta Expected Return: A .85 9.2% B 1.08 11.8% C 1.69 15.3% D .71 7.8% E 1.45 12.3% Zelo, Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock? Risk premium = 1.23 × (.10 - .045) = .06765 = 6.77% The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6% and the market risk premium is 9%. What is the expected rate ofThe stock of Martin Industries has a beta of 1....
View Full Document

{[ snackBarMessage ]}

### Page1 / 2

fin422 final cheat 4-5-11 - ght ed average cost of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online