Finance

#1)  Blaxo Ballons manufactures  and distributes birthday ballons. At the beginning of the year Blaxo’s commonstock was selling for $18.96 but by year end it was $17. 54.  If the firm paid a total cash dividend of $2.72 during the year, what rate of return would  you have earned if you had purchased the stock exactly one year ago? What would your rate of return have been if the firm had paid no cash dividend?

#2) Syntex, Inc. is considering an investment in one of two common stocks.Given the information that follows, which investment is better,  based on the risk (as measured by the standard deviation)and  return?

(a) Given the information in the table, the expected rate of return for stock A is ———%. What is the standard deviation for stock A. What’s the expected rate of return for stock B? What is the standard deviation?

Common stock A                       Common stock B

probability  return                  probability                 return

0.20             13%                       0.10                        -6%

0.60             16%                        0.40                       8%

0.20               18%                       0.40                       15%

0.10                       20%

#4) Penny Francis inherited a $100,000 portfolio of investment from hergrandparents when she turned 21 years of age. The portfolio is comprised of the following three investments:

data table              expected return             value

treasury bills                4.4%                       32,000

Ford(F)                         6.7%                       29,000

Harley Davidson (HOG)     11.3%                   39,000

(a) Based on the current portfolio composition and the expected rates of rreturn, what is the expected rate of return for Penny’s portfolio? (b) If Penny wants to increase her expected  portfolio of return, she could increase  the allocated weight of the portfolio she has invested in stock(Ford and Harley Davidson) and decrease her holdings of treasury bills. If Penny moves all her money out of treasury bills and splits it evenly between the two stocks, what will be her expected rate of return? (c) If Penny does move money out of treasury bills and into the two stocks she will reap a higher expected portifolio return, so why would anyone want to hold treasury bills in their portfolio?

#5) (a) Given the following holding period returns.compute the average returns and the standard deviations for the Sugita Corpotation and for the market. (b) If Sugita’s beta is 1.07 and the risk free rate is 7%. what would be an expected return for an investor owning Sugita? (Because the proceding returns are based on monthly data, you will need to annualize the returns to make them comparable with the risk-free rate. For simplicity, you can convert from monthly to yearly returns by multiplying  the average monthly returns by 12).

data table

month               Sugita Corp.             Market

1                            2.2 %                   1.0%

2                             -0.8                      3.0

3                             0.0                        2.0

4                             0.0                       2.0

5                               7.0                       5.0

6                                7.0                         0.0

(c) How does Sugita’s historical average  return compare with the return you would expect based on the Capital Asset Pricing Model and the firm’s systematic risk?

#6) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund’s investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund  sponsor has suggestedto James that the fund’s performance will hinge on how the national economy  performs in the coming year. Specifically, he suggested the following  possible outcomes:

data table

state of econemy              probability                        fund return rapid expansion and recovery       10%                         100%     modest growth                             50                              45 continued recession                      30                               20 falls into depression                       10                          -100% James has estimated the expected rate of return from this investment is 28.50%. James wants to apply his recently acquired understanding of the security market line concept to his analysis. (a) If the risk free rate of interest is currently 2.2 % and the beta for the investment is 3.8, what is the slope of the security market line for the real estate mortgage security investment ? (b) James is also considering the investment  of his money in a market index fund that has an expected rate of return of 9 %. What is the slope of the security market line( the reward to risk ratio) for this investment  opportunity? (c) Based on your analysis of parts (a) and (b) above which investment should James take? Why?

#7) Johnson Manufacturing, Inc. is considering seveeral investments. The rate on treasury bills is currently 8%, and the expected return for the market is 14.5%. What should be the expected rate of return for each investment (using the capital asset pricing model) (a) expected rate of return for security A, which has a beta of 1.75 is ——–%.

security                    beta

A                               1.75

B                               1.07

C                               0.62

D                                1.38

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