Problem 1 (24 marks):
You are given the following information on Aardvark (A) Inc, Bandicoot (B) Inc and the TSX market portfolio, under 5 different economic conditions. Aardvark Inc has a correlation with the market portfolio of 0.9 and Bandicoot Inc has a correlation with the market portfolio of -0.5. The TSX market portfolio has a standard deviation of 10%. The government of Canada T-bill is yielding a return of 4%.
State of the Economy | Probability | Return on A | Return on B |
Boom | 0.3 | 30% | 8% |
Improving | 0.2 | 20% | 8% |
No change | 0.2 | 10% | 10% |
Slowdown | 0.2 | 0% | 12% |
Recession | 0.1 | -20% | 15% |
Problem 2 (8 marks):
You have $100,000 to invest in a portfolio containing Xantus shares and Yak shares. Your goal is to create a portfolio that has an expected return of 10.6%. Xantus has an expected return of 11.4% and a beta of 1.25. Yak has an expected return of 8.68% and a beta of 0.85,
Problem 3 (4 marks)
For each stock state whether it is overvalued, undervalued or correctly priced if the risk-free rate of return is 3.2% and the expected return on the market is 11.6%. Also state your investment strategy (buy, sell, or hold).
Stock | Beta | Expected Return |
A | 1.46 | 15.79% |
B | 0.72 | 8.62% |
Problem 4 (10 marks)
A company recently paid a dividend of $1.45. You expect dividends to grow at a rate of 5% for 1 year, then level off to 3.5% per year, forever. The company’s shares have a correlation with the market of 0.8. The standard deviation of the market is 3.4% and the standard deviation of the stock is 2.5%. The return on T-bills is 3% and the market risk premium is 5%.
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.
Read moreEach paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.
Read moreThanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.
Read moreYour email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.
Read moreBy sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.
Read more