Question

Assume that you have $330,000 invested in a stock that is returning 11.50%, $170,000 invested in a stock that is returning 22.75% and $70,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio? (a) 15.6% (b) 12.9% (c) 14.8% (d) 18.3%

A bond that is selling at a discount has a yield to maturity that: (a) is unrelated to the bond's coupon rate (b) is less than the coupon rate (c) exceeds the coupon rate (d) equals the bond's coupon rate

An investor purchased a common stock at a price of $60 and the dividend expected to be paid at the end of one year is $1.80. After the payment, dividends are expected to grow at 5% per year indefinitely. What is the expected annual rate of return on the stock? (a) 8.0% (b)1.8% (c) 3.0% (d) 5.4%

As the economic impact of the coronavirus has significantly impacted corporate revenues and earnings, two (2) funding sources - bond issuance and bank loans have had dramatic interest rate reductions. Explain why some companies are lowering their funding costs while others are not.

Answer 1

1]

Expected return of 3-asset portfolio Rp = w1R1 + w2R2 + w3R3

where Rp = expected return

w1 = weight of Asset 1

R1 = expected return of Asset 1

w2 = weight of Asset 2

R2 = expected return of Asset 2

w3 = weight of Asset 3

R3 = expected return of Asset 3

Total value of 3 assets = $330,000 + $170,000 + $70,000 = $570,000

Expected return = (($330,000 / $570,000) * 11.50%) + (($170,000 / $570,000) * 22.75%) + (($70,000 / $570,000) * 110.25%)

Expected return = 14.8%

2]

(c) exceeds the coupon rate

Bond prices and yields are inversely related. Higher the yield, lower the price and vice versa. This is because the price of a bond is the present value of its cash flows, discounted at the yield.

3]

expected return = (next year dividend / current share price) + growth rate

expected return = ($1.80 / $60) + 5%

expected return = 8.0%