Ruiz Jacqueline_FIN7570-800_Module 1 Test
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William Paterson University *
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7570
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Finance
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Feb 20, 2024
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docx
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Jacqueline Ruiz
Investment Policy, Ethics, and Portfolio Management
William Paterson University
Professor Malindretos
FIN7570-800
Module 1 Assignment
A. PROBLEMS
:
1. We have a stock Bottine and Despotakis (B&D) which we buy for $10. We keep it for 6 years, at which point we sell it for $25. During the six-year period, it pays us $12 which we reinvest at 5% annual return. Calculate the rate of return we make per annum.
Reinvested Dividends = $
12
x
(
1
+
0.05
)
6
=
$
12
x
1.34
=
$
16.08
Total Value of Investment = $
25
+
$
16.08
=
$
41.08
Compound Annual Growth Rate = (
$
41.08
$
10
)
1
6
−
1
=
1.2655
−
1
=
0.2655
∨
26.55%
The annual rate of return per annum is approximately 26.55%.
2. We have the following information. We have two companies we are considering. They are Anthony and Ben and their betas are 1 and 1.4, respectively. The T bond rate is .02 and the rate of return in the market is .12. The debt rates of the two firms are .30 and .60 in order we have mentioned them. Finally, their tax rates are .25 and .40, respectively. Compute their cost of equity. If they each pay $4 and their growth rate is .01, what are their prices? Expound
on the differences, and in which one you would invest and why.
Anthony’s Cost of Equity = 0.02
+
1
(
0.12
−
0.02
)
=
0.02
+
0.10
=
0.12
Ben’s Cost of Equity = 0.02
+
1.4
(
0.12
−
0.02
)
=
0.02
+
0.14
=
0.16
Anthony’s Share Price = $
4
0.12
−
0.01
=
$
4
0.11
=
$
36.36
Ben’s Share Price = $
4
0.16
−
0.01
=
$
4
0.15
=
$
26.67
I would invest in Anthony’s stock. Anthony’s share price is higher than Ben’s due to its lower risk. Anthony has a lower beta, a lower cost of equity, lower debt rate and lower tax rate.
Anthony’s is comparatively a much less risky stock than Ben’s, as is reflected in the share price difference. B. ESSAYS:
1. Expound on the determinants of beta.
The beta of a stock or investment security is the calculation of its volatility of returns in comparison to the entire market. The three determinants of beta are cyclicality, operating leverage, and financial leverage. Usually, the earnings of a company keep on shifting with time due to the firm cycles. The earnings can go up in the growth phase and can go down when a firm is in the contraction phase. So, the company's earnings are related to the conditions of business. Cyclicality of sales shows how sensitive the product is toward the economy. High beta often implies high cyclicality of a business which makes it riskier. Financial leverage is described as the debt portion of a company. It shows how much debt a company has taken to run the business. The more the debt, the greater is the risk of the business. Degree of operating leverage shows the fixity of a company’s assets, such as machinery and equipment. As the amount of fixed costs increase, the operating break-even point for the company also increases. This creates more risk of operating at a loss. As a result, a higher degree of operating leverage means higher beta.
2. Discuss systematic versus unsystematic risk. Give examples of each. Which one is more important and why?
Systematic risk is a non-diversifiable risk or a measure of overall market risk. These factors are beyond the control of the business or investor, such as economic, political, or social factors.
Systematic risks affect the financial market as a whole and cannot be minimized or eliminated. Inflation risk is an example of systematic risk because the erosion of purchasing power due to inflation affects all investments. Unsystematic risks are unique to a specific company or investment. Microeconomic factors that affect companies are unsystematic risks, such as an unforeseen rise in oil prices. Systematic risk is considered more important from a portfolio management perspective because it affects all investments simultaneously. Investors cannot diversify away systematic risk, and it plays a crucial role in determining overall market returns. Unsystematic risk is known to be unimportant, as it is more relevant for individual investors. Through diversification, investors can minimize or eliminate unsystematic risk, which allows them to focus on earning a return associated with systematic risk factors.
*5. Create an IPS for 2 of your clients. Jill is 25 years old, and she has $40,000 and her income is $55,000. Joe has $40 million, has an income of $100,000 and has an age of 45. Both have medium risk. Jill wants capital appreciation. Joe wants capital preservation. Pay particular attention to the concept of return, age, and time horizon of the two individuals. Explicate how you would invest their money and why.
Jill has a long investment time horizon as she is only 25 years old. Her investment goals include saving for major life events such as homeownership, education, and retirement. Given Jill's long-time horizon and the desire for capital appreciation, a huge portion of her portfolio (around 80%) should be allocated to diversified equity investments. I would also allocate around 15% to fixed-income securities to add stability to the portfolio. The remaining 5% would
be kept as cash to provide stability. I would invest in a variety of sectors and industries to avoid concentration risk. I would invest in a variety of sectors and industries to avoid concentration risk. On the other hand, Joe, being 45 years old, has a shorter time horizon than Jill. His focus is
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Related Questions
uppose you had the following propositions of returns from two companies W and Y:
Company
Returns (OMR)
Comments
W
1204
Company W proposes to give 1204 Rial today
Y
1550
Company Y proposes to give you 1550 but after 2 years
You also know that the Interest Rate is by 10%.Question: In which company do you choose to invest your money and why?
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Q2:
A $15,000 investment is to be made with anticipated annual returns as
shown in the spreadsheet in the below Figure. If the investor's time
value of money is 10% per year, what should be entered in cells B11,
B12, and B13 to obtain present, annual, and future equivalent values for
the investment? Also draw the cash flow of this problem.
1
2
3
36457
9
10
11
12
13
A
EDY
0
1
lekm
2
3
4
SOTSPAL
5
6
7
F
B
Cash flow
-$15,000
$2,000
$2,500
$3,000
$3,500
$4,000
$4,000
$4,000
$4,000
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QUESTION 4
Suppose you make a 2-year investment of $100,000 and it grows by 100% to $200,000 during the first year.
During the second year, however, the investment suffers a 50% loss, from $200,000 back to $100,000.
Calculate the geometric mean return rate.
0%
15%
25%
18%
QUESTION 5
A mutual fund salesperson has arranged to call on three people tomorrow. Based on past experience, the salesperson knows there is a 20% chance of closing a sale on each call. Below is the probability distribution of the number of sales. Determine the Expected number of sales the salesperson will make.
Random Variable X = # sales
P(X)
3
0.08
2
0.096
1
0.384
0
0.512
a) 0.816
b) 0.716
c) 0.616
d) 0.516
QUESTION 6
A random variable is a function or rule that assigns a number to each outcome of an experiment.
True
False
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uestion
Consider three securities that will pay risk-free cash flows over the next three years and that have the current market prices shown here:
This question: 10p
Security
Price Today ($) Cash Flow in
Cash Flow in
Cash Flow in
Two Years ($) Three Years ($)
Name
One Year ($)
B1
$92.42
100
B2
$84.32
100
B3
$382.92
500
Calculate the no-arbitrage price, or the price that eliminates any arbitrage opportunities, of a new security, B4, that pays risk-free cash flows of $500 in one year and $1,000 in three years.
The current no-arbitrage price of Security B4 is:
(round your answer to two decimal places)
O Time
tv
9
MacBook Air
DD
DII
F10
F9
F8
888
F7
80
F6
F5
F4
F3
esc
F2
F1
&
* OC
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Solving for Unknown Variables for Different Investments
Solve for the unknown variables in each of the four separate investment scenarios. Assume interest is compounded annually in each case.
Round final answer to the nearest whole number or percentage point.
Use a negative sign only for an amount related to PV.
Investment 1
Investment 2
Investment 3
Investment 4
RATE
Answer
7%
4%
6%
NPER
4
Answer
12
10
PV
$(14,500)
$(63,800)
Answer
$(237,800)
FV
$23,200
$101,500
$52,200
Answer
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iption
Problem 1
Douglas Keel, a financial analyst for
Orange Industries, wishes to estimate the
rate of return for two similar-risk
investments, X and Y. Douglas's research
indicates that the immediate past returns
will serve as reasonable estimates of
future returns. A year earlier, investment
X had a market value of $27,000; and
investment Y had a market value of
\$64,000. During the year, investment X
generated cash flow of $2,025 and
investment Y generated cash flow of $
7,327. The current market values of
investments X and Y are $27,781 and
$64,000, respectively.
a. Calculate the expected rate of return
on investments X and Y using the most
recent year's data.
Submit Assignment
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Capital Assets Pricing Model (CAPM)
(20 points)
4. You have landed an interview with Gold & Silver Bank, and they are asking you to calculate the
expected return on a series of assets they are evaluating. They provide the data below and have sent
you a few additional questions.
Risk-free rate
5.26%
Stock
Expected Return
Betas
ALMM
45.32%
9.2
AIR
34.10%
5.1
BLUE
61.20%
3.7
87.20%
4.5
MON
Given the expected return on an asset, E(Ri), is equal to the risk-free rate, Rf, plus the risk premium.
-
E(R)=R₂+ [E(RM) – Rƒ] × Bi
What is each stock's expected return, E(Ri)? Provide the result as x.xx%.
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QUESTION 7
If you have $100K, and want to invest in assets A, B and C. Asset A has historical AVG return of 15%, asset B 20%, and asset C 10%, in what proportions of $100K would you allocate into assets A, B and C? i.e. Which scenario is most rational?
A > B > C
A > C > B
B > A > C
C >A > B
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Question 5
Investment products have different probabilities of success. A businessman wishes
to invest in two different products, A and B. The following table shows the
probability distributions, where P(a, b) represents the probability of success of the
ith investment of A and the ih investment of B, for the values (in thousands of GH¢)
for A and B invested in 4 different years. Base on this information:
(a)
(b)
(c)
A
B
P(a,b)
3
6
0.3
2
4
0.2
5
3
0.4
1
2
0.1
Which of the investments has a better return and why?
Which of the investments is relatively less risky and why?
What type of association exists between the two investment options A and
B? Interpret your results.
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Betas Answer the questions beiow for assets A to D shown in the following table.
Asset
Beta
so
B
1.60
- 20
D
.90
a. What impact would a 10% increase in the market return be expected to have on
each asser's return?
b. What impact would a 10% decrease in the market return be expected to have on
each asser's return?
c. If you were certain that the market retum would increase in the near future,
which asset would you prefer? Why?
d. If you were certain that the market return would decrease in the near future,
which asset would you prefer? Why?
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challenge 4 Next, use a financial calculator. You can use your own scientific or financial calculator, or click the calculator button below to access one online. Assume the annual yield to maturity is 10%. Enter your answer into the space below, then click "Submit" to check your work. Face Value (FV) $5000 Remaining Payments (N) 10 Coupon Payment (PMT) $181.25 Answer: $ challenge 4 , use a financial calculator. You can use your own scientific ulator, or click the calculator button below to access one onli ime the annual yield to maturity is 10%. er your answer into the space below, lick "Submit" to check your work. Hint: Don't forget to enter the yield per payment period (semiannual) for I/YR. Inputs =�,1��,���,�� Remainin Payment: Output =�� (N) 10 Answer
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Problem 2
ABM Enterprise would like to evaluate/analyze an investment proposal.
Given the following:
Investment amount 450,000 (2022)
Dividends / Revenue stream - 100,000 for the first year and an interval of 5,000 for the
succeeding years
Discount rate - 14%
a. NPV for the perio 2023 through 2029;
b. Total NPV using manual computation;
c. Total NPV using the Excel function; and
d. IRR rate.
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Consider two secunitios that pay risk-free cash flows over the next two yoars and that have the current market prices shown here (Click on the following icon in
order to copy its contents into a spreadshoet)
Price Today
$384
Cash Flow in Two Years
Security
Cash Flow in One Year
B1
$400
B2
$344
$400
a. What is the no-arbitrage price of a secunty that pays cash flows of $400 in one year and $400 in two years?
b. What is the no arbitrage price of a security that pays cash flows of $400 in one year and $2,800 in two yoars?
c. Suppose a security with cash flows of $200 in one year and $400 in two years is trading for a price of $520 What arbitrage opportunity is available?
a. What is the no-arbitrage price of a secunity that pays cash flows of S400 in ono yoar and $400 in two yoars?
The no arbitrage price is s (Round to the nearest dollar)
b. What is the no-arbitrage price of a security that pays cash flows of $400 in one yoar and $2,800 in two years?
The no-arbitrage price is S (Round to…
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V1
Here's an excerpt from an interview between Magellan fund co-founder Hamish Douglass and AFR reporter Vesna Poljak, which appeared in the Australian Financial Review article ‘It's all about interest rates: Hamish Douglass’, 19 July 2019: Take a business growing at 4 per cent a year, with a cost of equity of 10 per cent based off a 5 per cent risk-free rate and a 5 per cent market risk premium: you would value that at around 16.6 times free cashflow. Now take a business growing at the same rate, with a 4 per cent risk free rate. At a 9 per cent cost of equity that would command a 20 times multiple, he says. At a 3 per cent risk-free rate, the cost of equity is 8 per cent, and the multiple is 25. Finally at 2 per cent – 'which is where the world is at the moment' – the same business would be worth around 33 times free cashflow. The 'multiples' that Hamish Douglass refers to could also be called: Select one: a. Annuity factors (=1/r*(1-1/(1+r)^T)). b. Perpetuity factors (=1/(r-g)). c.…
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HI5002 FINANCE FOR BUSINESS
Question 2
You have $50,000 saving and are considering a 30-year investment which is offered in two phases:
Phase 1: Investing that $50,000 as a lump sum in an investment in the securities market for 20 years. Your securities broker recommends two alternative options: Option A pays interest rate of 11.87%, compounding daily. Option B pays interest rate of 12%, compounding quarterly.
Phase 2: At the end of 20 years, putting the total amount accumulated in the first phase into another investment, which will pay you an equal income at the end of each year for 10 years.
Required:
a) Identify which option should you choose in Phase 1 by computing the effective annual interest rate (EAR)?
b) Calculate the amount of money you would accumulate in Phase 1 after 20 years if you choose Option A?
c) If you would like to have exactly $600,000 after 20 years, how much the…
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Capital asset pricing model (CAPM) For the asset shown in the following table, use the capital asset pricing model to find the required return. (Click on the icon here in order to copy the
contents of the data table below into a spreadsheet.)
Risk-free
rate, RF
9%
The required return for the asset is %. (Round to two decimal places.)
Market
return, m
14%
Beta, b
1.4
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HI5002 FINANCE FOR BUSINESS
Question 2
You have $50,000 saving and are considering a 30-year investment which is offered in two phases:
Phase 1: Investing that $50,000 as a lump sum in an investment in the securities market for 20 years. Your securities broker recommends two alternative options: Option A pays interest rate of 11.87%, compounding daily. Option B pays interest rate of 12%, compounding quarterly.
Phase 2: At the end of 20 years, putting the total amount accumulated in the first phase into another investment, which will pay you an equal income at the end of each year for 10 years.
Required:
Assume that after 20 years, you put totally $500,000 in the investment in Phase 2, calculate the amount of yearly income would you receive each year for 10 years if the required rate of return is 12.5%, compounding annually?
In phase 2, assume the payment of income is changed to 74,000…
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Q1. One of your company's customer has approached you and the customer says
that he wishes to invest 20,000 OMR. Following data is provided for your
reference
Company name
Expected returns R
Standard Deviations o
Euro Foods
20
| 10
Sohar Foods
14
8.
A. Calculate the expected returns for the suggested portfolios as below,
Portfolio
Euro Foods
Sohar Foods
1.
25%
1 75%
75%
25%
3.
50%
50%
B. Calculate the coefficient of variation of shares on Euro Foods and Sohar
Foods.
C.
89 F C
H/2
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K
Capital asset pricing model (CAPM) For the asset shown in the following table, use the capital asset pricing model to find the required return. (Click on the icon here
in order to copy the contents of the data table below into a spreadsheet.)
Risk free
rate, Re
2%
The required return for the asset is (Round to two decimal places)
Market
return, f
8%
CONTE
Beta, b
0.2
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Hide student question
Issue #11: Comparison of Returns on $200000 and 5.5% on$70,000
Investors, as reasonable economic creatures commit toinvestment portfolios with the expectation of earning valuable returns. Keon as a logical investor believes his investment should provide the best value of rewards and is considering which option to invest in. The expected returns should be something similar or equal to his historical gain of 9% per annum.
If Keon should leave $70,000 in the safe investment , his only expected return will be $3,850 (70,000*5.5%) in nominal terms per annum.
However, if he invests the $200,000 by going entrepreneurial, Keon can potentially make a significant gain as per below.
Return on Investment (ROI)
ROI = Net Income * 100 Cost of Investment
Cost of investment = $200, 000
Cost of 1 Limousine = 80,000
Total Cost of Limousines = (80,000*4) = 320,000
Useful Life of 1 Limousine = 20 yrs
Depreciation per year = 80,000 = 4,000 20…
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Two investments generated the following annual returns:
Investment X
13%
17
24
19
8
20X0
20X1
20X2
20X3
20X4
a. What is the average annual return on each investment? Round your answers to one decimal place.
The average annual rate of return on X:
The average annual rate of return on Y:
b. What is the standard deviation of the return on investments X and Y? Round your answers to two decimal places.
-Select-
%
%
Standard deviation of X:
Standard deviation of Y:
c. Based on the standard deviation, which investment was riskier?
was riskier.
Investment Y
23%
26
14
25
20
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- uppose you had the following propositions of returns from two companies W and Y: Company Returns (OMR) Comments W 1204 Company W proposes to give 1204 Rial today Y 1550 Company Y proposes to give you 1550 but after 2 years You also know that the Interest Rate is by 10%.Question: In which company do you choose to invest your money and why?arrow_forwardQ2: A $15,000 investment is to be made with anticipated annual returns as shown in the spreadsheet in the below Figure. If the investor's time value of money is 10% per year, what should be entered in cells B11, B12, and B13 to obtain present, annual, and future equivalent values for the investment? Also draw the cash flow of this problem. 1 2 3 36457 9 10 11 12 13 A EDY 0 1 lekm 2 3 4 SOTSPAL 5 6 7 F B Cash flow -$15,000 $2,000 $2,500 $3,000 $3,500 $4,000 $4,000 $4,000 $4,000arrow_forwardQUESTION 4 Suppose you make a 2-year investment of $100,000 and it grows by 100% to $200,000 during the first year. During the second year, however, the investment suffers a 50% loss, from $200,000 back to $100,000. Calculate the geometric mean return rate. 0% 15% 25% 18% QUESTION 5 A mutual fund salesperson has arranged to call on three people tomorrow. Based on past experience, the salesperson knows there is a 20% chance of closing a sale on each call. Below is the probability distribution of the number of sales. Determine the Expected number of sales the salesperson will make. Random Variable X = # sales P(X) 3 0.08 2 0.096 1 0.384 0 0.512 a) 0.816 b) 0.716 c) 0.616 d) 0.516 QUESTION 6 A random variable is a function or rule that assigns a number to each outcome of an experiment. True Falsearrow_forward
- uestion Consider three securities that will pay risk-free cash flows over the next three years and that have the current market prices shown here: This question: 10p Security Price Today ($) Cash Flow in Cash Flow in Cash Flow in Two Years ($) Three Years ($) Name One Year ($) B1 $92.42 100 B2 $84.32 100 B3 $382.92 500 Calculate the no-arbitrage price, or the price that eliminates any arbitrage opportunities, of a new security, B4, that pays risk-free cash flows of $500 in one year and $1,000 in three years. The current no-arbitrage price of Security B4 is: (round your answer to two decimal places) O Time tv 9 MacBook Air DD DII F10 F9 F8 888 F7 80 F6 F5 F4 F3 esc F2 F1 & * OCarrow_forwardSolving for Unknown Variables for Different Investments Solve for the unknown variables in each of the four separate investment scenarios. Assume interest is compounded annually in each case. Round final answer to the nearest whole number or percentage point. Use a negative sign only for an amount related to PV. Investment 1 Investment 2 Investment 3 Investment 4 RATE Answer 7% 4% 6% NPER 4 Answer 12 10 PV $(14,500) $(63,800) Answer $(237,800) FV $23,200 $101,500 $52,200 Answerarrow_forwardiption Problem 1 Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Douglas's research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment X had a market value of $27,000; and investment Y had a market value of \$64,000. During the year, investment X generated cash flow of $2,025 and investment Y generated cash flow of $ 7,327. The current market values of investments X and Y are $27,781 and $64,000, respectively. a. Calculate the expected rate of return on investments X and Y using the most recent year's data. Submit Assignmentarrow_forward
- Capital Assets Pricing Model (CAPM) (20 points) 4. You have landed an interview with Gold & Silver Bank, and they are asking you to calculate the expected return on a series of assets they are evaluating. They provide the data below and have sent you a few additional questions. Risk-free rate 5.26% Stock Expected Return Betas ALMM 45.32% 9.2 AIR 34.10% 5.1 BLUE 61.20% 3.7 87.20% 4.5 MON Given the expected return on an asset, E(Ri), is equal to the risk-free rate, Rf, plus the risk premium. - E(R)=R₂+ [E(RM) – Rƒ] × Bi What is each stock's expected return, E(Ri)? Provide the result as x.xx%.arrow_forwardQUESTION 7 If you have $100K, and want to invest in assets A, B and C. Asset A has historical AVG return of 15%, asset B 20%, and asset C 10%, in what proportions of $100K would you allocate into assets A, B and C? i.e. Which scenario is most rational? A > B > C A > C > B B > A > C C >A > Barrow_forwardQuestion 5 Investment products have different probabilities of success. A businessman wishes to invest in two different products, A and B. The following table shows the probability distributions, where P(a, b) represents the probability of success of the ith investment of A and the ih investment of B, for the values (in thousands of GH¢) for A and B invested in 4 different years. Base on this information: (a) (b) (c) A B P(a,b) 3 6 0.3 2 4 0.2 5 3 0.4 1 2 0.1 Which of the investments has a better return and why? Which of the investments is relatively less risky and why? What type of association exists between the two investment options A and B? Interpret your results.arrow_forward
- Betas Answer the questions beiow for assets A to D shown in the following table. Asset Beta so B 1.60 - 20 D .90 a. What impact would a 10% increase in the market return be expected to have on each asser's return? b. What impact would a 10% decrease in the market return be expected to have on each asser's return? c. If you were certain that the market retum would increase in the near future, which asset would you prefer? Why? d. If you were certain that the market return would decrease in the near future, which asset would you prefer? Why?arrow_forwardchallenge 4 Next, use a financial calculator. You can use your own scientific or financial calculator, or click the calculator button below to access one online. Assume the annual yield to maturity is 10%. Enter your answer into the space below, then click "Submit" to check your work. Face Value (FV) $5000 Remaining Payments (N) 10 Coupon Payment (PMT) $181.25 Answer: $ challenge 4 , use a financial calculator. You can use your own scientific ulator, or click the calculator button below to access one onli ime the annual yield to maturity is 10%. er your answer into the space below, lick "Submit" to check your work. Hint: Don't forget to enter the yield per payment period (semiannual) for I/YR. Inputs =�,1��,���,�� Remainin Payment: Output =�� (N) 10 Answerarrow_forwardProblem 2 ABM Enterprise would like to evaluate/analyze an investment proposal. Given the following: Investment amount 450,000 (2022) Dividends / Revenue stream - 100,000 for the first year and an interval of 5,000 for the succeeding years Discount rate - 14% a. NPV for the perio 2023 through 2029; b. Total NPV using manual computation; c. Total NPV using the Excel function; and d. IRR rate.arrow_forward
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