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We are trying to get a sense of how an investor you are advising is trading off risk and return. After several long discussions you come to the conclusion that his level of risk aversion is somewhere between A=3 or 4. A) Draw the indifference curve in risk-return space corresponding to a utility level of 0.05 for an investor with a risk aversion coefficient A=3. Choose standard deviations ranging from 0 to 0.3 in 0.05 steps B) Now draw the indifference curve corresponding to a utility level of 0.05 for an investor with risk aversion coefficient A=4. C) Comparing your answers to part a and b. what do you conclude about the two indifference curves? Particularly, comment on the slope and how this reflects the differences in risk aversion.
You convince your client to think more about how to mix different assets. You first focus on splitting the investment between a broad based index of the US stock market (M) and T-bills. Your analysis tells you that E(rm)=9%, σm=18% . T-bills offer a 2% risk-free rate of return. A) You first take a close look at the investment choices. What is the Sharpe ratio of the market? B)If your investor wanted to achieve an expected return of 8% by mixing by T-bills and the market portfolio M, what fraction y of funds would she invest in the risky asset? C) If your client has risk aversion A=3, what is her optimal investment weight y in the risky asset? What does your client have to do in order to achieve this optional mix of the two assets? D) Due to recent market turmoil following the failure of the US bailout, you update your estimate of future volatility over the next year to σm=24%. What is the new optimal investment weight y?
I've found the CAPM beta for gold to be -0.21761. I'm wondering now if the market excess return is expected to decrease by 10%, what is the predicted change in the excess return on gold? If the expected market excess return is 5%, what is the CAPM pr..
Briefly explain the following debt features: Loan Agreement. Restrictive Covenant.
What methods of financing and which basic documents are uses to conduct international trade transactions? Explain?
An organization can easily depict its financial status by use of financial ratios. The most common are the Liquidity ratios which entail current ratio and the quick ratio. The current assets and current liabilities ratio is known as the current ratio..
In the past, Sunnyfax Publishing paid out all its earnings as dividends. When the stock market opened for trading today, Sunnyfax's share price was $38 and earnings for the year ending today are $3 per share. If the reinvestment does not affect Sunny..
Prepare the journal entry to reflect the initial $86,000 investment and evaluate the three proposals for expansion, providing the pros and cons of each option
Western Airlines is considering a new route that will require adding an additional Boeing 777 to its fleet. Western can purchase the airplane for $225 million or lease it for $25 million per year. As a one-year decision, does purchasing or leasing th..
A common stock was held for 2 years during which time total dividends of $20 were paid. The stock was sold for $100. What was the purchase price of the stock if the total rate of return for the period was 32%?
PV of multiple cash flows: Ferris, Inc., has borrowed from their bank at a rate of 8 percent and will repay the loan with interest over the next five years. Their scheduled payments, starting at the end of the year are as follows—$450,000, $560,000, ..
Bank A has $100 million of mortgages with an adjustable rate of HIBOR + 2%. These assets are financed with $100 million of fixed-rate deposits costing 5%. Bank B has $100 million investment of fixed-income notes with a fixed rate of 7%, which are fin..
Calculate the present value of an annuity (as a series of uniform payments) (use Table 7). 2a. Beth has won the $40 million lottery!! She will receive $2million per year for 20 years. If Beth could invest the money at 7% interest what is the $20 mill..
Walmart is considering opening a small experimental store in New York City. A store is expected to have a long economic life, but the valuation horizon is 15 years. The store in New York is likely to generate revenues of $34M in the first year and th..
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