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The following are the monthly rates of return for Madison Corp. and for Sophie Electric during a six-month period.
a. Compute the average monthly rate of return for each stock.
b. Compute the standard deviations for each stock.
c. Compute the covariance between the rates of return.
d. Compute the correlation between the rates of return.
e. What level of correlation did you expect?
How did your expectations compare with the computed correlation?
Would these two stocks offer a good chance for diversification. Why or whynot?
A 20- year bond with a par value of 1000 has 9 percent annual coupon. The bond currently sells for $ 925. if the remains at its current rate. What will be the price of the bond 10 years from now?
Greta, an elderly investor, has a degree of risk aversion of A = 4 when applied to return on wealth over a 3-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 3-year strategies. Assuming the correlati..
The Onboard Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 24.7 percent a year for the next 3 years and then decreasing the growth rate to 3.9 percent per year. The company just paid its ..
10-year T Bonds have a yield of 5.3% and 10 year corporate bonds yield 6.75%. Also, corporate bonds have a .25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasure and corporate 10 year bonds ..
Jeff buys a house for $220,000. He makes a 10% down payment and nances the remaining balance with a 15 year mortgage. The annual interest rate is 2.875% and interest is compounded monthly. What is the total amount of interest that Jeff will pay?
Consider a graph of the security market line. Assume the vertical intercept is 3%, beta is 1.2 and the expected return on the market is 10%. What is the risk free rate of return? Express your number as a percentage.
Suppose you know that a company’s stock currently sells for $51 per share and the required return on the stock is 11 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it..
Each autumn, as a hobby, Suzanne De Angelo weaves cotton placemats to sell at a local crafts shop. The mats sell for $20 per set of four. The shop charges a 10% commission and remits the net proceeds to De Angelo at the end of December. De Angelo has..
Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent. What will these bonds sell for at issuance?
You are making a $120,000 investment and feel that a 20 percent rate of return is reasonable given the nature of the risks involved. You feel you will receive $48,000 in the first year, $54,000 in the second year, and $56,000 in the third year. You e..
What is the accumulated sum of each of the following streams of payments?
Cayman’s Crafters is also considering issuing new shares of common stock. Their investment banker has advised them that it is a good time to sell and that the market’s required rate of return on similar securities is currently 8.5%. You will be recei..
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