Actsc 372 – Fall 2008 Assignment 4
Due: Nov. 14, 2008
1.
Suppose a factor model is appropriate to describe the returns on a stock. The
current expected return on the stock is 10.5 percent. Information about those
factors is presented in the following chart:
Factor
Beta of Factor
Expected Value
Actual Value
Growth in GNP
2.04
3.5%
4.8%
Inflation
1.90
7.1%
7.8%
a.
What is the systematic risk of the stock return?
b.
The firm announced that its market share had unexpectedly increased from
23 percent to 27 percent. Investors know from past experience that the
stock return will increase by 0.36 percent for every one percent increase in
its market share. What is the unsystematic risk of the stock?
c.
What is the total return on this stock?
2.
Furniture Depot Inc. is an allequity firm with a beta of 1.6. The market risk
premium is 9 percent and the riskfree rate is 5 percent. The company is
considering a project that will generate annual aftertax cash flows of $510,000 at
yearend for five years. The project requires an immediate investment of $1.45
million. If the project has the same risk as the firm as a whole, should Furniture
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 Winter '09
 MARYHARDY
 Probability theory, Winnipeg Brew

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