Fin
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $21,000 per year forever. If the required return on this investment is 6.3 percent, how much will you pay for the policy?
This is a very straight forward PV of a Perpetuity problem, as covered in class. The formula is: PVP=C/r, so the answer is 21000/.063=333,333.33
22. What is the PV of the following cash flows over the next 4 years: 1000, 2000, 3000, and 4000? Assume interest rates are 6%.
Time Cash Flow 0 0 1 1,000 2 2,000 3 3,000 4 4,000 6% NPV CF= put in all corresponding cash flows Npv= but % then cpt
Diversification can reduce the portfolio's risk as measured by standard deviation to be less than the least risky investment
t
Excess return or risk premium is the return on a security less the risk free rate
t
Expected return of a portfolio depends on percentage of money in each asset, probability of each economic state, the return of each asset based on economic states, and the expected economic states
t
Increasing the number of compounding periods increases the future value of an investment but decreases the present value of an investment
t
Present value and future values are reciprocal
t
Small cap stocks had the highest average historical return, highest risk premium and the highest volatility/risk.
t
Your credit card company charges you 1.45 percent per month. what is the annual percentage rate on your account?
***APR is the periodic rate times the number of periods, so this is simply 1.45x12=17.4. ***
Systematic risk is synonymous with non-diversifiable risk and market risk which is rewarded, cannot be eliminated, applies to a large group of assets, and is measured by beta
t
The effective annual rate and annual percentage rate are equal when interest is compounded annually
t
Double Taxation
- corporations pay taxes on profits then pay dividends to shareholders which are taxed again. So, the money is taxed twice before the shareholder receives it.
5% simple 3 years on only $800
.05*800= $40 * 3 years= $120 Simple interest= rate * principle * time
risk free has a beta of
0.00
The expected return of a stock portfolio must be between the lowest and best performing stocks and should not depend on the unsystematic risk of each stock, rather only the systematic risk of each stock.
t
Unexpected returns should average out to zero in the long-run but can be positive or negative in the short-run.
t
Use effective annual percentage rate to compare loans
t
annuity is equal payments
t
increasing the number of compounding periods increases the future value of an investment but decreases the present value of an investment
t
perpetuity goes on forever
t
systematic risk will impact all securities differently in a portfolio
t
the increase in the number of stocks in a portfolio results in a decline standard deviation of annual portfolio returns
t
there is no correlation between the unsystematic risk of two companies from different industries
t
The dividend yield is the next period's dividend divided by the current stock price
t Div yield= D1/P0
The capital gains yield and total return can be negative but the dividend yield can never be negative
t company cant pay out a negative divened
US Treasury Bills have the lowest risk premium and lowest volatility compared to other bonds or stocks
t it is zero USTB
double taxation
taxation of dividends both as corporate profit and as personal income
• Amortized -
the borrower makes payments throughout the life of the loan which include both interests and principle that fully pay off the loan at the end of the term
• Interest only -
the borrower males only interest payments during the term of the loan and then pays off all the principal in a single lump sum at the end
What is the expected return on a security with beta of 1?
the expected return on the market
market risk premium
(rmarket-riskfree)
caluclaitng future value Pv 100 100 100 years 10 10 5 Interest rate 10% 15% 10%
100(1.10)^10=259.37 100(1.15)^10= 404.56 100(1.10)^5= 161.051
11. John invested $100 for 3 years at 8% simple interest. If he could have earned compound interest he would have earned how much more money?
100*.08= 8*3 years= $24 simple interest $124 simple interest n= 3 yr= 8 Pv= 100 Fv=? 125.97-124= $1.97
12. You currently earn $40,000 per year at your job. If you get a 5% raise per year, what will your salary be after 4 years? If instead, you earned 7% raise per year, how much MORE money will your salary be?
40,000* (1+.05)^4 = 48620.25 40,000* (1+.07)^4= 52431.84= 3811.59
Diversifiable risk is synonymous with unsystematic risk which is not rewarded, can be eliminated and applies to individual assets or industries.
t
FVIF
= Future value interest factor. These represent the amount $1 today is worth in the future. These will be more than one.
PVIF
= Present value interest factor. These represent the amount $1 in the future is worth today. These will be less than one.
You buy an annuity which will pay you $7,800 a year for 15 years. The payments are paid on the first day of each year. What is the value of this annuity today if the discount rate is 12 percent?
= a (1-(1+r)^n/r) (1+r)
2. Owlie invested $10,000 in Owl Computers 4 years ago and has been earning 8% every year. Owlie never withdrew any interest from the account so each year, Owlie earned more interest. Describe the interest effect? a) Discounting b) Compounding c) Computing d) Simplifying
Compounding
15. Suppose a stock had an initial price of $84 per share, paid a dividend of $2.05 per share during the year, and had an ending share price of $79. What was the total return, Dividend yield and the capital gains yield?
Div yield= DIv/ old Cap gains yield= New-old/ old total return= new - old + cf/ old total return = Div yield + Capital gains yield total return= 79- 84+ 2.05/ (84) = -3.51% Div yield= 2.05/84 2.44% Cap gains yield= 79-84/84= -5.95%
You are investing $100 today in Owl Stock and in one year expect it to be worth $115. Which term correctly describes the value of your stock in one year? a) Present Value b) Principal Value c) Future Value d) Time Value
Future Value
9. Which of the following will yield the lowest present value interest factor? a) 5% for 6 years b) 5% for 8 years c) 7% for 6 years d) 7% for 10 years
Fv* (1/(1+r)^n)= PV d) 7% for 10 years longer time less value higher the discount the lower the present value
if you deposit $5300 at the end of each of the next 20 years into an account paying 10.80 percent interest how much money will you have in 20 years?
Fv= Pv(1+r)^n
your grandfather started a college fund for you when you were 3 years old he deposited 10,000 in an accounting 6% interest every year you are now 18 and ready to start college how much money is currently in the account?
Fv= Pv(1+r)^n N=15 I%= .06 PV= 10,000 PMT FV? 10,000(1.06)^15 23965.58
FVIF (Future Value Interest Factor)
Fv=Pv(1+r)^n FVIF= (1+r)^n
assuming you purchased a $50 face value bond what is the exact rate of return you would earn if you held the bond for 20 years until it doubled?
In a) they are simply asking to find the interest rate if you bought at $50, sold at $100 20 yrs later: N=20, PV= -50, FV=100, i=?? 3.526492 or 3.53% for this answer. Or i=(100/50)^(1/20) - 1.
If you purchased a $50 face value bond in early 2017 at the then current interest rate of .10 percent per year how much would the bond be worth in 2027?
In b) they tell you poor wording, what if the bond only earned .1%, what would you have in 2027 10 years later? N=10, PV= -50, i=.1, FV=?? 50.502256 or 50.50 for this answer. Or FV=50(1+.1)^10.
You are planning on renting out your extra room and have two people who will pay you an annuity of $1000 per month for 12 months. Jake is willing to pay you on the first of the month, but Sally won't pay you until the end of the month. If you assume a 6% discount rate, which of the following is true: a) Jake's annuity has a larger present value than Sally's annuity b) Sally's annuity has a larger future value than Jake's annuity c) The present value and future values of both annuities are the same d) Jake's payment represents an ordinary annuity whereas Jill's payment represents and annuity due
Jake beginning (annuity due) worth more in present and future sally later *ordinary annuity) a) Jake's annuity has a larger present value than Sally's annuity
Goal of Financial Management -
Maximize shareholder value, typically measured by the stock price
you would like to take a trip to hawaii in 5 years one time deposit 7% the trip is expected to cost $10,000
N= 5 I% =.07 Pv= Fv= 10,000 Pv= Fv/ (1+r)^n 10,000/(1.07)^5 = 7129.86
you have been investing $165 a month for the last 12 years. today, your investment account is worth $60,508.29. what is your average rate of return on your investment?
N=12x12=144 PMT=-165 FV=60,508.29 I=??1.1575x12=13.89
"You've invested 130 per month for the last 15 years. Today the investment is worth 75,000. What is the Rate of Return?"
N=15x12=180 PMT=-130 FV=75000 I=??=1.1249x12=13.5%
You're prepared to make monthly payments of $210, beginning at the end of this month, into an account that pays 6.2 percent interest compounded monthly. How many payments will you have made when your account balance reaches $12,000?
N=?? I=6.2/12=.51667 PMT=-210 FV=12,000 So N=50 or about 4.2 yrs.
Annuity car problem You want to buy a new sports coupe for $50,000, and the finance office at the dealership has quoted you a 9.2 percent APR loan for 48 months to buy the car. Your monthly payment will be $ and the effective annual rate on this loan is ?? percent?
Ok so this is a monthly annuity, so in the Fin Calc: N=48, i=9.2/12=.766666, PV=50000, PMT=??-1249. Next the want the EAR, so the EAR=[(1+apr/m)^m - 1], so EAR=[(1+.092/12)^12 - 1]=.09598.
24. Suppose you invest $1000. After 4 years, you have 1500 in the account. What rate of interest did you earn?
PV= -1,000 N= 4 years FV= 1500 what rate of interest did you earn? 10.67%
9. Moshe received a $10,000 gift for his Bar Mitzvah. However, the money is tied up in a money market account expected to earn 7% a year. Today, he is finally able to redeem his gift and is excited to find out he has $30,000 in the account. Rounded to the nearest year, how old is Moshe today?
PV= -10,000 FV= 30,000 I= 7 n= 1.82
21. You have $500,000 to retire and plan to live for 20 more years. If interest rates are 6%, how much can you withdraw each year?
PV= -500,000 N=20 IY= 6% 42,776.74
PVIF
PV= FV/(1+r)^n PVIF= 1/(1+r)^n
20. The risk-free rate of return is 4.9 percent and the "market risk premium" is 6.5 percent. What is the expected rate of return on a stock with a beta of 1.31
Ri= rF+B(Rmarket-Riskfree) .049+1.31(.065) .134*100= 13.4
The y-intercept of the security market line corresponds to which of the following: a) Market risk premium b) Risk free rate c) Expected market return d) Market beta
Risk free rate
History lessons -
Small Cap Stocks are the riskiest and highest return. Treasury bills have the lowest risk premium and the least volatility
16. You've observed the following returns on Goo-goo gum stock over the past five years: 2 percent, 10 percent, 25 percent, 4 percent, and 18 percent. What is the variance of these returns? What is the standard deviation?
Standard Deviation= .10 Variantion= St Dav. x^2 .01 2nd -> data 2nd -> stat
Correlation -
a measure of variation of one variable with another. In finance, this could be the variation of one stock's return against another stock's return. As long as it is less than one, you will get diversification benefits reducing risk. Ideal is negative 1 correlation so you can eliminate all risk but that won't happen in the real world, lol.
The calculation of a portfolio beta is similar to the calculation of:
a portfolios expected return
the calculation of a portfolio beta is similar to the calculation of
a portfolios expected return
The bank quotes you a quarterly rate and your finance friend expresses it to you as an annual rate. The rate quoted by your friend would be called a: a) Effective Rate b) Periodic Rate c) Annual Percentage Rate d) Compound Rate
a) Effective Rate
The amount of systematic risk of a stock as measured by beta directly affects which of the following: a) Expected return b) Expected risk c) Standard deviation d) Variance
a) Expected return
6. Bernie and Hillary both invest $10,000,000 in their bank accounts earning 25% interest (#politicians) for 10 years. Bernie plans to spend the interest every year to pay for his grandchildren's college tuition but Hillary plans to keep all her earned interest in this private account. Based on the above - which of the following is true: a) Hillary will earn interest on interest b) Bernie will earn interest on interest c) After one year, an investigation of Hillary's bank account will show less interest money earned than Bernie. d) After one year, an investigation of Hillary's bank account will show more interest money earned than Bernie.
a) Hillary will earn interest on interest
The stock market over the past 6 months provided an average return of 8% whereas the US Treasury Bill offered a 3% return over the same period. Which term correctly defines the 5% interest spread? a) Risk Premium b) Reward Premium c) Risk Spread d) Reward Spread
a) Risk Premium took on risk to the stock
Which of the following risks does standard deviation measure? a) Total b) Systematic c) Unsystematic d) Portfolio
a) Total
If you are analyzing and assessing the future performance of a stock, which form of market efficiency would give you the greatest opportunity to make money? a) Weak b) Semi-strong c) Strong d) It doesn't matter because you aced finance!
a) Weak
EAR
after compounds assumes "annual compounding"
10. Goldstein and Silverstein first union bank offer you a loan of 12.2% compounded semi-annually to fund your college education. FAU offers you a 12% loan compounded daily. Who should you borrow from?
apr=nom= 12.2 2 (C/Y(down twice)=2) (Iconv= 12.20) 12 365= 12.75 gold stein and silver stein are better with a lower rate
Effective portfolio diversification results in which of the following: a) Decrease in portfolio beta b) Decrease in portfolio standard deviation c) Increase in portfolio return d) Increase in portfolio risk
b) Decrease in portfolio standard deviation
You observe that the market prices of securities appears to accurately reflect the information available. According to finance theory, which term would best describe this market? a) Risky b) Efficient c) Riskless d) Fair
b) Efficient
Diversification can do which of the following: a) Eliminate all of the total risk b) Eliminate some of the total risk c) Eliminate all of the market risk d) Eliminate some of the grade risk
b) Eliminate some of the total risk
The _____ return is the average compound return over a period of time, whereas the ______ return is the non-compounded average return over a period of time. a) Real; Nominal b) Geometric; Average c) Nominal; Real d) Average; Geometric
b) Geometric; Average
8. Ben and Jeb are going to college in 2 and 4 years, respectively. Like all high school graduates, they will each be eligible to receive $40,000 towards their college education. If both of them apply a 6% discount rate to the subsidy, which of the following is true? a) The present value of Jeb's money is higher than Ben's b) In today's dollars, Ben's money is worth more than Ben's c) In 10 years, the future dollars will be the same d) In today's dollars, the value of both of their monies is the same
b) In today's dollars, Ben's money is worth more than Ben's
Using the historical average over a long period of time will tend to __________ the return, whereas using the geometric average over a short period of time will tend to _______ the return. a) Overstate; Overstate b) Overstate; Understate c) Understate; Overstate d) Understate; Understate
b) Overstate; Understate
A linear function corresponding to the relationship of expected returns on securities relative to their corresponding betas is known as: a) Systematic risk line b) Security market line c) Risk premium line d) Market to stock line
b) Security market line equation of line is CAPM Slope= market risk y int is risk free rate
Your gym friend constantly brags about how much money he makes in the market because of his inside connections. Knowing he can make money in this way, you determine the market is at best what form of efficiency? a) Weak b) Semi-strong c) Strong d) Inefficient
b) Semi-strong
You invest in a diverse group of securities. What risk still applies to most securities that you should be compensated for? a) Unique risk b) Systematic risk c) Unsystematic risk d) Diversifiable risk
b) Systematic risk
how can a positive relationship between the expected return on a security and its beta be justified?
because the difference between the return on the market and the risk free rate is likely to be positive
treasury bills risk free
beta= 0
7. Brad wishes to invest in Owl Tutoring. Analysts estimate the company to have a beta of 1.3. The current return on treasury bills is 4% and the market has been averaging 10% recently. What return should Brad expect to earn on his investment?
beta= 1.3 tb= .04 market= .10 r= tb+ beta(market-tb) market risk premium ( reward for bearing risk) .04+1.3(.10-.04)=.118
• Pure discount -
borrower receives money today and owes fixed amount in the future paid in a single lump sum that includes both interest and principal
3. Jack wants to purchase a car. He negotiates a price of 13,650 and an APR of 5.5%. The dealership offers him a five year loan. What is his monthly payment?
buy and then pay purchase price is present value pv= -13,650 i= 5.5/12 n= 5*12= 60 260.73 monthly payment
3. Interest earned only on principal is called _________ while interest earned on principal and interest is called ________ a) Principal Interest, Aggregate Interest b) Discount Interest, and Future Interest c) Simple Interest, Compound Interest d) Basic Interest, Exponential Interest
c Simple Interest, Compound Interest
The _____________ is the equation of the Security Market Line showing the relationship between a security's beta (measure of risk) and its corresponding return. a) Systematic Risk Model b) Unsystematic Risk Model c) Capital Asset Pricing Model d) Efficient Market Model
c) Capital Asset Pricing Model
Which of the following is NOT true about unsystematic risk: a) It can be diversified away by the investor b) It typically affects only one area of assets c) Investors bearing this risk are rewarded d) It can be lowered by adding treasury bills
c) Investors bearing this risk are rewarded
When computing the expected return on a portfolio, which of the following should be used to determine the weight of each asset? a) Number of shares b) Price of each share c) Market value of all shares owned d) Book value of all shares owned
c) Market value of all shares owned
The market risk premium is equal to which of the following: a) Risk free rate less expected return b) One c) Slope of the Security Market Line d) Y intercept of the Security Market Line
c) Slope of the Security Market Line
When would inside information not add value? a) Weak form efficient markets b) Semi-strong form efficient markets c) Strong form efficient markets d) It never adds value
c) Strong form efficient markets
You observe a few of your stock investments in oil suddenly dropped in value after the economic outlook showed an excess supply. What type of risk did you just experience? a) Market b) Systematic risk c) Unsystematic risk d) Non-diversifiable risk
c) Unsystematic risk
APR=Ear when annual compounding EAR>APR
t
10. Which of the following will yield the highest future value interest factor? a) 5% for 6 years b) 5% for 8 years c) 7% for 6 years d) 7% for 10 years
d) 7% for 10 years PV* (1+r)^n
Which is an example of unsystematic risk? a) A terrorist attack causes national panic b) The federal reserve raises interest rates c) The average corporate tax rate increases d) Consumer spending on travel decreases
d) Consumer spending on travel decreases
5. Your Trump Stock is going to pay a HUGE dividend and make your bank account great again but not for 6 more months. What is the name of the process you would use to find the value of that dividend today? a) Simplifying b) Computing c) Guestimating d) Discounting
d) Discounting
You are planning on renting out your extra room and have two people who will pay you an annuity of $1000 per month for 12 months. Jake will pay you $1000 per month each month. Jill can only pay you $500 per month for the first 2 months, but will pay you $1,100 a month for the remaining 10 months to make up the payment shortages in the first two months. If you assume a 6% discount rate, which of the following is true: a) Jill's payments represent a higher future value b) Jill's payments represent an annuity c) Jake's payments represent a perpetuity d) Jake's payments will have a higher present value
d) Jake's payments will have a higher present value
Which of the following is the interest rate the bank quotes you? a) Compound Rate b) Effective Annual Rate c) Periodic Rate d) Stated Rate
d) Stated Rate annual percentage rate
What does standard deviation measure? a) Reward to risk ratio b) Systematic risk c) Unsystematic risk d) Volatility
d) Volatility
. Great Grandpa Bernie has promised to give you $50,000 to cover your college tuition. If you decide to delay college by two years, what happens to the present value of this gift? a) Stays the same b) Increases c) Decreases d) Berns!
decreases inverse relationship between time and present value
Fv= 100 100 100 years= 3 3 5 interest rate= 8% 5% 8%
discounting these future values back t present value 100/(1.08)^3= 79.38 100/(1.05)^3= 86.38 100/ (1.08)^5= 68.06 time increase pv decreases you have to wait longer time decrease pv increases getting money sooner is better interest rate increase pv decreases interest rate decrease pv increases
Which of the following is a measurement of systematic risk of an asset relative to the average systematic risk of the market? a) Standard Deviation b) Variance c) Beta d) Delta
equally risk = beta 1 c) Beta
Security market line
equation of line is CAPM Slope= market risk y int is risk free rate
what is the equation fro the capital asset pricing model?
expected return on security = risk-free rate+ beta * ( return on market-risk free rate)
The approximate formula for the real rate of return is nominal rate - risk free rate whereas the exact real rate is (1 + nominal rate) divided by (1 + real rate)
f approximate nominal= real + inflation real = nominal - inflation exact= 1+ real = 1_ nominal /1 + inflation
An increase in volatility corresponds to an increase in the risk premium
t
1895 prize=150, 2010 prize=1,350,000 i= 8.23 Next they ask using the same rate, what this prize will be in 2040
fv= PV(1+r)^t 1,350,000(1.0824)^30
compound interest
interest earned on both the principal amount and any interest already earned
simple interest
interest paid on the principal alone
beta
is the measure risk relative to the market
What is unsystematic risk?
it is a risk that affects a single asset or a small group of assets
• Balloon loan -
like an amortized loan except the payments of interest and principal do not fully pay off the loan so a lump sum (balloon payment is due at the end)
13. You invested $1,000 in Owl Bond yielding 10% for 12 years. You cashed out after only 8 years of earning the 10% interest. How much more money would you have earned if you waited the full 12 years?
n= 12 pv= 1000 rate= 10 Fv=? 1000*(1.10)^12= 3138.428 1000*(1.10)^8= 2143.588 994.84
18. You have won the lottery and are offered a series of payments of 25,000 a year for 20 years. Assuming the discount rate is 10%, how much would you want as a lump sum?
n= 20 pmt= 25,000 iy= 10 pv=217,298.40
Pv: 3350 8000 Fv= 10,514 12,695 Interest rate- 10% 8% Years= ? ?
n= ln (Fv/Pv) / ln( 1+r) ln(10514/3350)/ln(1.10)= 12 ln( 12,695/8,000) / ln(1.08)= 6
you would like to purchase a fancy sports coupe that will cost you 80,000 you have 20,000 to invest today your broker found you a money market instrument yielding 8% return
n= ln (Fv/Pv) / ln( 1+r) ln(60,000/20,000)/ln(1.08)
25. Your financial planner offers you an annuity for $50,000 promising a 10% return for the next 10 years. How much should you expect to receive as payment each year?
n=10 iy= 10 PV= -50,000 8137.27 50,000= PMT [ 1- (1/1+.10)/ .10
26. An investment officer offers you a structured annuity promising a payment of 10,000 a year for 5 years. However, the payments don't start until the third year. If the appropriate discount rate is 6%, how much is the annuity worth to you today?
n=5 PMT= 10,000 Rate= 6% 43,244.53
Define an ordinary annuity: a) Increasing payments over a fixed period of time b) Equal payments over a fixed period of time made over regular intervals c) Increasing payments paid out forever d) Equal payments paid out forever made at regular intervals
ordinary= at the end annuity= limited # of payments equal amount and equal interval b) Equal payments over a fixed period of time made over regular intervals
If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be:
positive
4. You and your fellow Owls pooled money together to buy into the PowerBall and won!! Instead of receiving 20 payments of $10 Million a year, you choose to receive all your money today which of course is discounted to a lower amount. This amount is called the? a) Current Value b) Present Value c) Discount Value d) Interest adjusted Value
present value
14. At graduation, Betty's parents invest $22,000 in a 5% money market security that can't be touched for 10 years. When Betty can finally reap the benefits of her gift, how much will she get?
pv= -22,000 I/y= 5% n=10 FV= 30,000
1. Juliana borrows $250,000 to buy her dream house. She agrees to a 5%, 30-year (fixed) loan with monthly payments. How much is her monthly payment?2. Assuming she makes all (360) payments on time, how much interest will she ultimately pay?
pv= -250000 i= 5/12% n= 30* 12= 360 year monthly payments =1342.05*360= 483,139.46-250,000= 233,139.46
calculate the interest rate pv 2500 5000 Fv 3673 10,061 years 5 12 interest rate ? ?
r= (Fv/Pv)^1/N - 1 ((3673/2500) 1.4693^1/5)1.08-1= 8.00% (10,061/5000)2.0122^1/121.06-1= .06* 6%
in 1985 purchased comic book 2.25 in 2011 that same comic book is worth $100 what was the annual rate of return on your investment?
r= (Fv/Pv)^1/n -1 (100/3.25)=30.76^1/16=1.2388-1=23.88 n= 16 i%= ? PV = 3.25 PMt= FV= 100
Solving for r with an infinite compound PV=400, FV=596.73, i=10%, n=4
r= ln(FV/PV)/N ln(596.73/400)/4= 10%
1. Juliana borrows $250,000 to buy her dream house. She agrees to a 5%, 30-year (fixed) loan with monthly payments. How much is her monthly payment?
rule is interval must match Iy= 5%/12= monthly rate= PV= -250,000 n= 30 *12= 360 months
It would be useful to understand how the _________ of the risk premium on a risky asset is determined
size
4. Jessica has a $1000 to invest. She invests $400 in stock A with a beta of 1.3, $200 in stock beta which is equally risky as the market, and the remainder in t-bills. What is her portfolio beta?
stock a $400 beta 1.3 stock b $200 t billls 400 $1000 total market beta= 1 t bills beta = 0 (risk free) Formula= (summation) F*x/ftotal (400* 1.3) +(200*1)+(400*0)/ 1,000= 720/1000= .72
17. You own a portfolio that has $3,000 invested in Stock A and $1,500 invested in Stock B. The expected returns on these stocks are 15 percent and 10 percent, respectively. What is the expected return on the portfolio?
stock a 3000 * .15= 450 stock b 1500 * .10 = 150 4500 f*x/ ftotal 600/ 4500= .13 *100 = 13.33
according to the capital pricing model (CAPM) what is the expected return on a security with a beta of zero?
the risk free rate
what is the intercept of the security market line (SML)?
the risk free rate
two components of expected return on the market
the risk of premium the risk free rate
standard deviation
the square root of the variance
what are the two components of unexpected return (U) in the total return equation?
the unsystematic portion the systematic portion
How are the unsystematic risks of two different companies in two different industries related?
there is no relationship
Increasing the discount rate of an annuity or perpetuity will decrease the present value but increase the future value
true
There is an inverse relationship between time and present value
true
The annual rate is equal to the periodic rate multiplied by the number of periods
true 1% per month * 12 months = APR
Define a perpetuity: a) Increasing payments over a fixed period of time b) Equal payments over a fixed period of time made over regular intervals c) Increasing payments paid out forever d) Equal payments paid out forever made at regular intervals
unlimited, unending or infinite d) Equal payments paid out forever made at regular intervals
What does the efficient market hypothesis assume? a) Arbitrage opportunities are readily available with technical analysis b) New information is slowly incorporated into security prices c) Investments offer a zero net present value d) All profits are retained by corporations
you will be fairly priced c) Investments offer a zero net present value
