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CHAPTER 13 B-237 9. Such layoffs generally occur in the context of corporate restructurings. To the extent that the market views a restructuring as value-creating, stock prices will rise. So, it’s not layoffs per se that are being cheered on. Nonetheless, Wall Street does encourage corporations to takes actions to create value, even if such actions involve layoffs. 10. Earnings contain information about recent sales and costs. This information is useful for projecting future growth rates and cash flows. Thus, unexpectedly low earnings often lead market participants to reduce estimates of future growth rates and cash flows; price drops are the result. The reverse is often true for unexpectedly high earnings. Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. The portfolio weight of an asset is total investment in that asset divided by the total portfolio value. First, we will find the portfolio value, which is: Total value = 180(\$45) + 140(\$27) = \$11,880 The portfolio weight for each stock is: Weight A = 180(\$45)/\$11,880 = .6818 Weight B = 140(\$27)/\$11,880 = .3182 2. The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset. The total value of the portfolio is: Total value = \$2,950 + 3,700 = \$6,650 So, the expected return of this portfolio is: E(R p ) = (\$2,950/\$6,650)(0.11) + (\$3,700/\$6,650)(0.15) = .1323 or 13.23% 3. The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset. So, the expected return of the portfolio is: E(R p ) = .60(.09) + .25(.17) + .15(.13) = .1160 or 11.60%

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B-238 SOLUTIONS 4. Here we are given the expected return of the portfolio and the expected return of each asset in the
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