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Rolls critique of tests of the CAPM shows that if the index portfolio is ex post efficient, it is mathematically impossible for abnormal returns, as measured by the empirical market line, to be statistically different from zero.
Yet the Ibbotson study on new issues uses the crosssection empirical market line and finds significant abnormal returns in the month of issue and none in the following months. Given Rolls critique, this should have been impossible. How can the empirical results be reconciled with the theory?
Write out the Security Market Line (SML) equation and use it to calculate the required rate of return on each alternative. Compare the expected rates of return with the required rates of return. How do these perform against your predictions?
Suppose you know that a company’s stock currently sells for $66.90 per share and the required return on the stock is 9 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. If it’s..
A factory can be worth $500,000 or $1,000,000 in 2 years, depending on product demand, each with equal probability. - What is the present value of the factory?
A $20 Million 8-year bond pays 6.25% coupon with a 6% yield. Use the model to construct a 70% synthetic floater and 30% inverse-floater. The required synthetic has a 4% basis + 2% spread. Summarize your results including prices, price durations and c..
You have your choice of two investment accounts. Investment A is a 14-year annuity that features end-of-month $1,350 payments and has an interest rate of 7.2 percent compounded monthly. Investment B is a 6.7 percent continuously compounded lump sum i..
Outline your findings on the ethical standard for a corporation's financial and tax reporting. State specific examples of the ethical standards and laws that you are following as the tax and financial analyst. Based on your research, state recent exa..
Project Evaluation [LO1] Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 82,000 2 95,000 3 109,000 4 104,000 5 85,000 Production of the implants will require $1,610,000 in n..
How do U.S. laws define insider trading? What are the effects and complexities involved of insider trading? Research and summarize a real case of insider trading and its resolution, if any.
Suppose a stock had an initial price of $70 per share, paid a dividend of $1.35 per share during the year, and had an ending share price of $88. Compute the percentage total return.
Seven years ago, you cut costs for employee health insurance by switching from open-ended insurance to health maintenance organizations (HMOs). At that time, you kept open-ended insurance for retirees because your employees told you that retirees wan..
Rebecca calculated that she needs a total of $1,400,000 at retirement (beyond pensions and social security). Rebecca is 34 years old, investing aggressively and expecting to earn 7% in her retirment account. She plans to retire at age 62. How much do..
Maggie's Muffins, Inc., generated $2,000,000 in sales during 2013, and its year-end total assets were $1,400,000. Also, at year-end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and ..
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