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Finance 5151 Assignment

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Finance 5151 Assignment 1.You bought a stock one year ago for \$ 48.71 per share and sold it today for \$ 58.68 per share. It paid\$ 1.91 per share dividend today. a. What was your realized return? (Round to two decimal places.) b. How much of the return came from dividend yield and how much came from capital gain? Round two decimal 2. You bought a stock one year ago for \$ 51.25 per share and sold it today for \$ 45.55 per share. It paid a \$ 1.89 per share dividend today. a. What was your realized return? (Round to two decimal places.) b. How much of the return came from dividend yield and how much came from capital gain? (Round to two decimal places.) (Round to two decimal places.) 3. Consider two local banks. Bank A has 92 loans outstanding, each for \$ 1.0 million, that it expects will be repaid today. Each loan has a 7 % probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of \$ 92 million outstanding, which it also expects will be repaid today. It also has a 7 % probability of not being repaid. Which bank faces less risk? Why? (Select the best choice below.) A. The expected payoffs are the same, but Bank A is less risky. I prefer Bank A. B. The expected payoff is higher for Bank A, but is riskier. I prefer Bank B. C. In both cases the expected loan payoff is the same: \$ 92 million times 0.93 equals \$ 85.6 million Consequently, I don’t care which bank I own. D. The expected payoffs are the same, but Bank A is riskier. I prefer Bank B. 4. You are a risk-averse investor considering investing in one of two economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together in good times all prices go up together, and in bad times they all fall together. In the second economy, stock returns are independent long dash one stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which one would you choose? Explain. (Select the best choice below.) A. A risk-averse investor would prefer the economy in which stock returns are independent because by combining the stocks into a portfolio he or she can get a higher expected return than in the economy in which all stocks move together. B. A risk-averse investor would choose the economy in which stocks move together because the uncertainty is much more predictable, and you have to predict only one thing. C. A risk-averse investor is indifferent in both cases because he or she faces unpredictable risk. D. A risk-averse investor would choose the economy in which stock returns are independent because risk can be diversified away in a large portfolio. 6. Suppose the market risk premium is 4 % and the risk-free interest rate is 4 % Using the data in the table below, calculate the expected return of investing in a. Starbuck’s stock. b. Hershey’s stock. c. Autodesk’s stock. Starbucks Hershey Autodesk Beta 1.20 0.28 2.14 a. Starbuck’s stock. The expected return of Starbucks stock is (Round to two decimal places.) 7. You own three stocks: 600 shares of Apple Computer, 10, 000 shares of Cisco Systems, and 5,000 shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-Palmolive are, respectively, \$ 548, \$16, \$90 and 12% , 10% , 8% a. What are the portfolio weights of the three stocks in your portfolio? b. What is the expected return of your portfolio? c. Suppose the price of Apple stock goes up by \$ 21 Cisco rises by \$ 4 and Colgate-Palmolive falls by \$ 12 d. Assuming the stocks’ expected returns remain the same, what is the expected return of the portfolio at the new prices? a. What are the portfolio weights of the three stocks in your portfolio? (Round to two decimal places.) 8. Suppose Autodesk stock has a beta of 2.50 , whereas Costco stock has a beta of 0.74 If the risk-free

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