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- FINC 3630 Advanced Business Finance Additional Practice Problems Risk and Return 1 You are considering an investment in two stocks Bart Inc and

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1 FINC 3630: Advanced Business Finance Additional Practice Problems Risk and Return 1. You are considering an investment in two stocks, Bart, Inc. and Lisa Corp. There are three possible states of the world: recession is expected with a probability of 0.5, modest growth is expected with a probability of 0.3, and boom is expected with a probability of 0.2. Bart Inc. is expected to earn -20%, 20%, and 25% in each of the three states, respectively. Lisa Corp. is expected to earn -10%, -5%, and 40% in each of the three states, respectively. If you create an equally weighted portfolio of these two securities, what is the standard deviation of your portfolio? 2. Calculate the coefficient of variation for each of the securities in the above problem. If you could only invest in one, which one would you choose? 3. Your assistant has been gathering information. Specifically, she has found the standard deviation of the market returns is 3.2% and the standard deviation of the stock’s returns is 12.5%. In addition, she has found the return on 10 year U.S. Treasury bonds is 5% and the expected market risk premium is 5.5%. If the expected return on the stock is 7.31%, what is the correlation coefficient between the stock and the market? 4. Three months ago, you purchased 1,000 shares of stock in Keven Corp. for $50 each. In addition, you purchased 10 Yost Corp. bonds with a coupon rate of 8 percent, paid semiannually, for $985 each, and a piece of art for $12,500. Since those purchases, the stock
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This note was uploaded on 12/11/2011 for the course FINC 3630 taught by Professor Jensen,m during the Summer '08 term at Auburn University.

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- FINC 3630 Advanced Business Finance Additional Practice Problems Risk and Return 1 You are considering an investment in two stocks Bart Inc and

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