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Greta,anelderlyinvestor,hasadegreeofriskaversionofA=5whenappliedtoreturnonwealthovera3
yearhorizon.Sheisponderingtwoportfolios,theS&P500andahedgefund,aswellasanumberof3year
strateg
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $12
probabilities of .5. The alternative risk-free investment in T-bills pays 5% per year.
a If you require a risk premium of 8%, how much will you be willing
Risk Adjusted Returns
FIN 640
Risk Adjusted Return Measures
Risk Adjusted Returns
In order to beat the market or any other benchmark, one must do so on a
risk-adjusted basis. The first step is to select an appropriate benchmark, for
example, use Russell 2
Macroeconomic Analysis
FIN 640
Economic Analysis
The top-down approach to analyze investments starts with analyzing the economy, followed by a
sector within the economy, followed by an individual firm within the sector.
Economy
Sector
Individual Firm
We s
Derivatives - Options
FIN 640
Options
Options differ from futures and forwards in that the payoffs are not fixed and
that options require cash up-front. In addition, options allow benefits from
the movement of the underlying and not to be harmed by moveme
2.1 Firms Disclosure of Financial Information
2.2 The Balance Sheet
2.3 Balance Sheet Analysis
2.4 The Income Statement
2.5 Income Statement Analysis
2.6 The Statement of Cash Flows
2.7 Other Financial Statement Information
2.8 Financial Reporting in Prac
FIN 640 Exam Review Questions
Exam 1:
1. Janet Smith, a new client, has $2 million to invest. After careful consideration you
have come up with four alternative portfolios, details of the portfolios are listed in
the table below.
Portfolio A
E[Rp]
8.00%
p
Ethics
The investment profession, and professional certifications such as the CFA, relies heavily upon reputation and trust.
A strong code of ethics is therefore vital. Below are the Code of Ethics and Standards of Professional Conduct as
presented by the
Industry Analysis
FIN 640
Industry Analysis
Three Stage Process:
1. Project Economic Growth (GDP and the Business Cycle)
2. Project Industry Sales
3. Project Firms Market Share (Sales)
I. Macroeconomic Analysis
Some important factors:
Forecast of Real GDP
Formulas
DM
DE
Macaulay duration
YTM
1
m
P P
2 P0 i
%P -DE * i
CE
P P 2 P0
2 P0 i 2
%P -duration* i + convexity* i2
semiannual rate * 2
[(1 + semiannual rate)2] 1
Nominal GDP *
GDP Deflatorbase year
GDP Deflatorcurrent year
Exam 1 Formulas
r
D1
g
P0
n
xi
n
i 1
i
_
xi
HPR
Ending Value of Investment
Beginning Value of Investment
HPY = HPR 1
1
GM HPR n 1
where :
the product of the annual holding period returns as follows :
HPR 1 HPR 2 HPR n
FV
GM
PV
1
n
1
Expected Retu
FIN 403 Lecture 2 Homework
NPV Problems
1. The cost of a new lathe is $20,000 is expected to return cash flows net of operating
costs of $9,000 per year for 5 years. Assume a cost of capital is 10%. What is the
most you should be willing to pay for this m
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
B
C
D
E
F
G
Chapter 09. Mini Case
Cost of Capital
Situation
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital
investments. Recently, thou
During the last few years, Harry Davis Industries has been too constrained by the
high cost of capital to make many capital investments. Recently, though, capital
costs have been declining, and the company has decided to look seriously at a major
expansio
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SupposethatborrowingisrestrictedsothatthezerobetaversionoftheCAPMholds.Theexpectedreturn
onthemarketportfoliois17%,andonthezerobetaportfolioitis8%.Whatistheexpectedreturnona
port
Suppose your expectations regarding the stock price are as follows:
State of the Market Probability Ending Price HPR (inc div)
Boom
0.30 $ 140.00
48.5%
Normal Growth
0.23 $ 110.00
13.5%
Recession
0.47 $
80.00
-19.5%
Mean
Standard Deviation
8.49%
29.23%
Us
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What must be the beta of a portfolio with E(rP) = 17.4%, if rf = 3% and E(rM) = 15%? (Do not round
intermediatecalculations.Roundyouranswerto2decimalplaces.)
Betaofaportfolio
1.23
Why WACC?
Assume that there are fixed flotation costs associated with new issues of stock and
bonds. Consequently we do not issue stock and bonds in small increments. We wait
until we can issue a significant number of shares or bonds.
Assume that in the o
NPV versus EAA
Consider the following prospective projects, for a firm with an 8
percent
WACC.
Year
0
1
2
3
4
A
B
(100)
50
50
50
(100)
40
40
40
40
NPV computation:
First, we compute NPV.
Present value of benefits
Less: cost
Net present value
128.85
(100.0
Computing Modified Internal Rate of Return MIRR
Computing MIRR is a two-step process. First we accumulate the
cash flows at the WACC until the end of the project. Then we
compare that lump sum with the original investment and
determine what rate of return
Free cash flow and disposition of FCF
Use your spreadsheet as a tool to compute FCF and for the
computation of the Disposition of FCF. If you follow this procedure,
you will never have trouble reconciling FCF and the Disposition of
FCF.
Step one: Group yo
The problem of multiple IRR values
Descartes Rule of Signs
Consider the n-degree polynomial
0 a0 a1 x1 a2 x 2 a3 x3 K an x n
where
0 x
.
How many possible real roots, or solutions, does it have in the
domain
0 x
?
Descartes Rule of Signs states that the m
1.
A.
B.
C.
D.
Final Review 1
Answer Key
Percy Motors has a target capital structure of 40 percent debt and 60 percent equity. The yield to
maturity on the companys outstanding bonds is 9 percent, and the companys tax rate is 40 percent.
Percys CFO has ca
MBA 6631 Managerial Finance Second Midterm Exam
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
_
_
_
_
_
1. Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer ha
10/16/2016
Assignment Results
RA=3.2%+1.10RM+eA
RB=1.4%+1.2RM+eB
M=30%RsquareA=0.28RsquareB=0.12
What is the standard deviation of each stock? (Do not round intermediate calculations. Enter your
answersasapercentroundedto2decimalplaces,withoutthepercentsi