Assignment5solutions

Assignment5solutions - 1. Foreachcompany, a. b.

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1.  For each company, a. Determine the mean and standard deviation of the returns. b. Calculate the coefficient of variation. c. Determine which company appears to be more volatile with respect to its risk. d. Identify the company with which you would choose to invest. 2. Using the CAPM, compute the expected return rate of return for Companies A and B. Assume a  Market Risk Premium of 3%, a Risk-Free Rate of 4%, a Beta for company A of .90 and a Beta for  company B of 1.3. 3. Using the CAPM, compute the expected rate of return for a portfolio with 25% stake in company A  and a 75% stake in company B.  Assume a Market Risk Premium of 3% and a Risk-Free Rate of  4%. Assignment 5.1 Solutions In this assignment, assume that you are nearing graduation and applying for a job with a financial  services firm.  As part of the evaluation process, you are asked to provide answers to a series of  questions on risk return, and the capital asset pricing model. Your responses will be based on the  data for Company A and Company B below. Year Company A’s  Return Company B’s  Return Average Market  Return 1995 5.0% 4.0% 2.0% 1996 4.0% -8.0% 6.0% 1997 3.0% 2.0% 7.0% 1998 4.0% 5.0% 8.0% Jones International University®, Ltd. : BBA 307: Finance 1
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1999 8.0% 3.0% 9.0% 2000 5.0% 4.0% 10.0% 2001 4.0% 1.0% 11.0% 2002 4.0% 8.0% 10.0% 2003 4.0% 9.0% 9.0% 2004 7.0% 10.0% 8.0% 2005 8.0% -2.0% 7.0% 2006 9.0% 7.0% 6.0% 2007 10.0% 5.0% 5.0% 2008 7.0% 4.0% 6.0% 2009 -4.0% 2.0% 7.0% 2010 -5.0% 11.0% 8.0% Procedure 1.  For each company, a.  Determine the mean and standard deviation of the returns.  b. Calculate the coefficient of variation.  2. Determine which company appears to be more volatile with respect to its risk.  3. Identify the company with which you would choose to invest.  4. Using the CAPM, compute the expected return rate of return for Companies A and B.  Assume a Market Risk Premium of 3%, a Risk-Free Rate of 4%, a Beta for company A of 
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This note was uploaded on 01/20/2012 for the course ACCT 407 taught by Professor Price during the Spring '11 term at Jones Intl..

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Assignment5solutions - 1. Foreachcompany, a. b.

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