Question

3. a) When adding a risky asset to a portfolio of many risky assets, which property of the asset

is more important, its standard deviation or its covariance with the other assets? Explain.

b) Suppose that the risky premium on the market portfolio is estimated at 8% with a standard deviation of 22%. What is the risk premium of a portfolio invested 25% in CEMENCO and 75% in Monrovia Breweries, if they have Betas of 1.1 and 1.25 respectively?

c)
Suppose the two factor portfolios, here called portfolio 1 and 2,
have Expected Returns E (r_{1}) = 10% and E(r_{2})
= 12%. Suppose further that the risk-free-rate is 4%. The risk
premium on the first factor portfolio is therefore 6%, while that
on the second factor portfolio is 8%. Now consider an arbitrary
well-diversified Portfolio (P), with Beta on the first factor,
BP_{1} =.2 and the second factor BP_{2} = 1.4. Find
the fair rate of return on the security.

d) What do most empirical studies suggest about the stock market?

4. a) Which of the following statements are true if efficient market hypothesis holds?

(i) It implies that future events can be forecast with perfect accuracy.

(ii) It implies that prices reflect all available information.

It implies that security prices change with no discernable reasons.

It implies that prices do not fluctuate.

b) What is a Bond Yield to Maturity (YTM)?

c) Why are bond ratings important to both firms and investors?

d) What is the bond indenture? What are protective covenants? Give examples.

5. a) Define the following types of bonds:

(i) Euro bond

(ii) Zero-coupon bond

Samurai bond

Convertible bond

Indexed bond

b) What is the option embedded in a callable bond? A puttable bond?

c) What are the cash flows associated with a bond?

d) A Metro gates industries’ bond has a 10 percent coupon rate and a US$1,000 face value. Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a 12 percent yield, what is the bond value? What is the effective annual yield on the bond?

Answer #1

3)a) Diversification is achieved by how less two securities are inter related, covariance measures the degree to which securities are co-related. hence Diversification is more important.

4)a) Efficient market hypothesis belives that all relevant available information are reflected by the prices of the securities.

4c) Bond rating for the firm indicates how much extra premium it has to pay to bondholders to raise money, while for the investor it indicates how much risk they are taking in buying bond. higher the bond rating lower the cost of capital for firm and lesser risk to the investors.

Which of the following statement is FALSE? Group of answer
choices
When using all risky assets available in the market in the
market and the risk-free asset to form portfolio, we find that all
efficient portfolios are on the Capital Market Line (CML).
If the CAPM holds, then all assets will graph on the Security
Market Line (SML).
If an asset graph above the SML, then this asset is under-priced
according to the CAPM.
Portfolios on the Capital Market Line...

According to CAPM, there is linear relationship between the
assets but APT assumes linear relationship between the risk
factors.
APT- Arbitrage Pricing Theory is a method of
estimating the price of the assets. This theory is based on
macroeconomics, market and security specific factors.
Formula- E(rj) = rf + bj1
RP1 +bj2 RP2 + bj3
RP3.......
Where E(rj) = Asset's expected rate of return,
rf = risk free rate, bj = the senstivity of
the asset's return to the factor,...

Suppose Asset A has an expected return of 10% and a standard
deviation of 20%. Asset B has an expected return of 16% and a
standard deviation of 40%. If the correlation between A and B is
0.35, what are the expected return and standard deviation for a
portfolio consisting of 30% Asset A and 70% Asset B?
Plot the attainable portfolios for a correlation of 0.35. Now
plot the attainable portfolios for correlations of +1.0 and
−1.0.
Suppose a...

What is the beta of a portfolio made up of two risky assets and
a risk-free asset? You invest 35% in asset A with a beta of 1.2 and
35% in asset B with a beta of 1.1?
Question 8 options:
1)
0.66
2)
0.81
3)
1.03
4)
1.14
5)
1.29
A firm has a cost of preferred stock 8%, and its yield to
maturity is 10%. This firm has a tax rate of 35%. Given these
information, which financing...

1- which one of the following statements regarding valuation is
false
a when using the discounted free cash flow model, we should use
a firm's wacc
b. the comparables method takes into acount important
differences between different firms
c the difference between the discounted free cah flow model and
the dividend discount model is that the latter computes a firms
stock price directly while the free cash flows model has to make
adjustments to get the share price
d one...

Capital markets in Flatland exhibit trade in four securities,
the stocks X, Y, and Z, and a riskless government security.
Evaluated at current prices in U.S. dollars, the total market
values of these assets are, respectively, $24 billion, $36 billion,
$24 billion, and $16 billion. (6 pts.)
Determine the relative proportions of each asset in the market
portfolio.
If an investor holds risky assets in proportion to their market
values and divides their aggregate portfolio of $100,000 with
$30,000 invested...

3. Suppose that you’re given a 8-year 7.2%-coupon bond with
$1,000 face value that pays the semi-annual coupon payments, the
bond price in the market is $886 per bond, answer the following
questions:
a) What is the yield to maturity? What is the idea of yield to
maturity? Explain the difference between your bond’s yield to
maturity versus the term structure of interest rates.
b) Suppose you are about to apply the immunization strategy for
the bond portfolio what is...

1)
You want to create a portfolio equally as risky as the market,
and you have $2,600,000 to invest. Given this information, fill in
the rest of the following table: (Do not round intermediate
calculations and round your answers to 2 decimal places, e.g.,
32.16.)
Asset
Investment
Beta
Stock A
$
494,000
1.40
Stock B
$
936,000
1.50
Stock C
$
?
1.60
Risk-free asset
$
?
?
2) The Hudson Corporation’s common stock has a beta of 1.5. If...

Q1-7. Which of the following statements are TRUE about coupon
bonds?
I. If there are two par bonds with the same coupon, market price
and principal but with different maturity, the one with longer
maturity should have higher duration.
II. A junk bond (or deep discount bond) must pay high coupon in
general as it contains high level of risk.
III. If an investor tries to avoid reinvestment rate risk as much
as possible, he/she should go for low coupon...

1.)
Sam Strother and Shawna Tibbs are vice presidents of
Mutual of Seattle Insurance Company and co-directors of the
company’s pension fund management division. An
important new client, the North-Western Municipal Alliance, has
requested that Mutual of Seattle present an investment seminar to
the mayors of the represented cities, and
Strother and Tibbs, who will make the actual presentation, have
asked you to help them by answering the following
questions.
a. What are the key features of a bond?
b....

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