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Financial Management Principals And Applications 11th Edition Sheridan Titman, John D Martin, Arthur J Keown - Solutions
How is the beta of a portfolio related to the betas of the individual investments in the portfolio?
Describe what is meant by systematic and unsystematic risk. How is this distinction related to an investment’s beta?
True or false: Portfolio diversification is affected by the volatility of the returns of the individual investments in the portfolio as well as the correlation among the returns.Explain this statement.
On a recent trip home for fall break, your grandfather tells you that he has purchased the stock of two firms in the automobile industry: Toyota and Ford. He goes on to discuss the merits of his decision and one of the points he makes is that he has avoided the risk of purchasing only one
Describe the relationship between the expected rate of return for an individual investment and the expected rate of return for a portfolio of several investments.
What did Depression-era humorist Will Rogers mean when he said “People tell me about the great return I’m going to get on my investment, but I’m more concerned about the return of my investment”?
(Related _to Regardless of Your Major: Risk and Your Personal Investment Plan on page 228) In the Regardless ofyour Major feature box, what are the four guidelines suggested for analyzing your personal investment decisions?
What is the market risk premium and how is it related to the Capital Asset Pricing Model?
Explain the concept of the security market line.
How is the portfolio beta related to the betas of the individual investments in the portfolio?
Who are Harry Markowitz and William Sharpe, and what did they do that was so important in finance?
When the returns of two risky investments are perfectly positively correlated, how does combining them in a portfolio affect the overall riskiness of the portfolio?
When the returns of two risky investments are perfectly negatively correlated, how does combining them in a portfolio affect the overall riskiness of the portfolio?
How is the expected rate of return on a portfolio related to the expected rates of return of the individual assets contained in the portfolio?
If you were given annual rate of return data for AMD or any other company's stock, and you were asked to estimate the average annual rate of return an investor would have earned over the sample period by holding the stock, would you use an arithmetic or geometric average of the histori- cal rates
In addition to the information provided above Larry has ob¬ served that the risk-free rate of interest for the coming year is 4.5%, the market risk premium is 5.5%, and the beta for the new investment is 3.55.
Now calculate the annual rate of return using the geometric av- erage monthly rate of return using the following relationship: Compound Annual Rate of Return == +1) Geometric Average Monthly Rate of Return,
Compute the annual rate of return for AMD using the begin- ning stock price for the period and the ending price (i.e., $4 and $2.18).
Calculate the year-end price for AMD computing the com- pound value of the beginning-of-year price of $4 per share for 12 months at the monthly geometric average rate of re- turn calculated above, i.e., Beginning of Year Stock Price End of Year Stock Price Geometric Average Monthly Rate of Return,
Calculate the average monthly rate of return for AMD using both the arithmetic and geometric averages.
Compute the monthly realized rates of return earned by AMD for the entire year.
(Comprehensive problem) Use the following end of year price data to answer the questions found below for the Barris and Carson Companies.
(Calculating the geometric and arithmetic average rate of return) The common stock of the Brangus Cattle Company had the following end-of-year stock prices over the last five years and paid no cash dividends:a. Calculate the annual rate of return for each year from the above information.b. What is
(Related to Checkpoint 7.2 on page 210) (Calculating the geometric and arithmetic average rate of return) Caswell Enterprises had the following end-of-year stock prices over the last five years and paid no cash dividends:a. Calculate the annual rate returns for each year from the above
(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) and return?
(Related to Checkpoint 7.1 on page 202) (Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 2.9 percent. Calculate the following investment's expected return and its standard deviation. Should Gautney invest in this
(Computing rates of return) From the following price data, compute the annual rates of return for Asman and Salinas.
(Calculating rates of return) Blaxo Balloons manufactures and distributes birthday balloons. At the beginning of the year Blaxo’s common stock was selling for $20 but by year end it was only $18. If the firm paid a total cash dividend of $2 during the year, what rate of return would you have
(Calculating rates of return) The common stock of Placo Enterprises had a market price of $12 on the day you purchased itjust one year ago. During the past year the stock had paid a $1 dividend and closed at a price of $14. What rate of return did you earn on your investment in Placo’s stock?
If the average dividend paid on the stocks in the index is approximately 4% of the value of the index at the beginning of the year, what is the rate of return earned on the S&P index? What is your assessment of the relative riskiness of the Google investment (analyzed in the previous problem)
(Calculating rates of return) The S&P stock index represents a portfolio comprised of 500 large publicly traded companies. On December 24, 2007, the index had a value of 1,410 and on December 23, 2008, the index was approximately
(Related to Checkpoint 7.1 on page 202) (Calculating rates of return) On December 24, 2007, the common stock of Google Inc. (GOOG) was trading for $700.73. One year later the shares sold for only $298.02. Google has never paid a common stock dividend.What rate of return would you have earned on
What is the “behavioral view” of market efficiency?
Do you think that the capital markets are completely efficient, efficient most of the time, or completely inefficient? Support your position as if you were talking to your favorite nephew who is only 10 years old.
Compare and contrast the notions of weak-form, semi-strong form, and strong-form market efficiency.
What is the efficient markets hypothesis? Explain this concept in your own words.
(Related to The Business of Life: Determining Your Tolerance for Risk on page 208) What is your tolerance for risk? Take the risk tolerance quiz referenced in the feature titled The Business ofLife: Determining Your Tolerancefor Risk and found at the website
Under what circumstances would you prefer to use the geometric average rate of return as opposed to the arithmetic average?
What is the relationship between the geometric average rate of return and compound interest?
What can you conclude about the relative risk of investing in the United States versus the Pacific region from Figure 7.3?
What does Figure 7.3 tell us about how the U.S. stock market has performed when compared to all the alternatives included in the figure over the period 1970-2009?
What is the equity risk premium and how is it calculated?
Describe the information contained in Figure 7.2 identifying which securities have performed the best over long periods of time. Some investors with long investment time horizons invest exclusively in bonds. Why do you think that is so?
Describe the five-step process used to calculate the variance in the rate of return for an investment.
Why is the volatility or variance in an investment’s rate of return a reasonable indication of the risk of the investment?
Describe the concept of an expected rate of return as if you were explaining it to your 10-year-old niece.
How does the expected rate of return concept differ from the realized rate of return?
How do cash dividends affect the realized rate of return from investing in shares of common stock?
Describe in words the concept of a realized rate of return. Assume that you are trying to describe the concept to your grandfather who has never had a finance class!
(Related _to Regardless of Your Major: Using Statistics on page 196) In the feature titled Regardless ofyour Major, we note that statisticians analyze data. Moreover, in your statistics class you learned about how to describe random outcomes using statistical measures such as expected values and
How do behavioral biases affect the efficiency of market prices?
What are the three categories of information that are commonly used to categorize tests of the efficient market hypothesis?
What is an "efficient market"?
Why is the geometric average different from the arithmetic average?
How is a geometric average rate of return computed? For example, what is the geometric average of the following annual rates of return: 10%, -10%, and 5%?
How is a simple arithmetic average computed? For example, what is the arithmetic average of the following annual rates of return: 10%, -10%, and 5% ?
Does the historical evidence suggest that investing in emerging markets is more or less risky than investing in developed markets?
What is the equity risk premium and how is it measured?
How well does the risk-return principle hold up in light of historical rates of return? Explain.
Why is variance used to measure risk?
What is the variance in the rate of return of an investment?
What is the expected rate of return and how is it different than the realized rate of return?
If you invested $100 one year ago that is worth $110 today, what rate of retum did you earn on your investment?
If the inflation rate averages 3.5 percent during Bill's retire- ment, how old will he be when prices have doubled from current levels? How much will a soda cost when Bill dies, if he lives the full 30 years and the soda costs $1 today?
Considering the information obtained in question 2, should Bill wait until age 67 for his Social Security benefits? If he waits until age 67, how will his Social Security benefit change the answers to question 2? (Hint: Calculate his port- folio value as of age 67 and then calculate how long that
Ignoring his Social Security benefit, is the amount deter- mined in question 1 sufficient to meet his current monthly expenses (keep in mind he will receive a pension of $2,800 per month)? If not, how long will his retirement last if his current expenses remain the same? What if his expenses are
Bill has an emergency fund already set aside, so he can use his $400,000 of savings for retirement. How much can he with- draw on a monthly basis to supplement his retirement annuity if his investments return 5 percent annually and he expects to live 30 more years?
(Comprehensive problem) Suppose that you are in the fall of your senior year and are faced with the choice of either getting a job when you graduate or going to law school.Of course, your choice is not purely financial. However, to make an informed decision you would like to know the financial
(Future value of a complex annuity) Springfield mogul Montgomery Burns, age 80, wants to retire at age 100 so he can steal candy from babies full time. Once Mr. Burns retires, he wants to withdraw $1 billion at the beginning of each year for 10 years from a special offshore account that will pay 20
(Comprehensive problem) Having just inherited a large sum of money, you are dying to determine how much you should save for retirement and how much you can spend now. For retirement, you will deposit today (January 1, 2010) a lump sum in a bank account paying 10 percent compounded annually. You
(Complex annuity payments) Milhouse, 22, is about to begin his career as a rocket scientist for a NASA contractor. Being a rocket scientist, Milhouse knows that he should begin saving for retirement immediately. Part of his inspiration came from reading an article on Social Security in Newsweek.
(Comprehensive problem) You would like to have $50,000 in 15 years. To accumulate this amount, you plan to deposit an equal sum in the bank each year that will earn 7 percent interest compounded annually. Your first payment will be made at the end of the year.a. How much must you deposit annually
(Present value of complex cash flows) How much do you have to deposit today so that beginning 11 years from now you can withdraw $10,000 a year for the next five years (periods 11 through 15) plus an additional amount of $20,000 in the last year(period 15)? Assume an interest rate of 6 percent.
(Present value of complex cash flows) You have an opportunity to make an investment that will pay $100 at the end of the first year, $400 at the end of the second year, $400 at the end of the third year, $400 at the end of the fourth year, and $300 at the end of the fifth year.a. Find the present
Assuming a 20 percent interest rate, find the present value of each investment.(Present value of an uneven stream of payments) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:What is the present value of each of these three
(Present value of annuities and complex cash flows) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:
(Related to Checkpoint 6.6 on page 177) (Present value of annuities and complex cash flows) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:Assuming a 20 percent discount rate, find the present value of each investment.
(Present value of a growing perpetuity) Your firm has taken on cost saving measures that will provide a benefit of $10,000 in the first year. These cost savings will decrease each year at a rate of 3% forever. If the appropriate interest rate is 6%, what is the present value of these savings?
(Present value of a growing perpetuity) As a result of winning the Gates Energy Innovation Award, you are awarded a growing perpetuity. The first payment will occur in a year and will be for $20,000. You will continue receiving monetary awards annually with each award increasing by 5% over the
(Present value of a growing perpetuity) What is the present value of a perpetuity stream of cash flows that pays $50,000 at the end of year one and then grows at a rate of 6% per year indefinitely? The rate of interest used to discount the cash flows is 10%.
(Related to Checkpoint 6.5 on page 175) (Present value of a growing perpetuity) What is the present value of a perpetuity stream of cash flows that pays $1000 at the end of year one, and the annual cash flows grow at a rate of 4% per year indefinitely, if the appropriate discount rate is 8%? What
(Present value of a perpetuity) At a discount rate of 8.5%, find the present value of a perpetual payment of $1000 per year. If the discount rate were lowered to half the size(4.25%), what would be the value of the perpetuity?
(Related to Checkpoint 6.4 on page 174) (Present value of a perpetuity)What is the present value of the following?a. A $300 perpetuity discounted back to the present at 8 percentb. A $1,000 perpetuity discounted back to the present at 12 percentc. A $100 perpetuity discounted back to the present at
(Future value of an annuity) Let’s say you deposited $160,000 in a 529 plan (a tax advantaged college savings plan) hoping to have $420,000 available 12 years later when your first child starts college. However, you didn’t invest very well, and two years later the account’s balance dropped to
(Annuity payments) Calvin Johnson has a $5,000 debt balance on his Visa card that charges 12.9 percent APR compounded monthly. In 2005, Calvin’s minimum monthly payment is 3 percent of his debt balance, which is $150. How many months (round up)will it take Calvin Johnson to pay off his credit
(Related to Checkpoint 6.3 on page 170) (Determining the outstanding balance of a loan) Five years ago you took out a $300,000, 25-year mortgage with an annual interest rate of 7 percent and monthly payments of $2120.34. What is the outstanding balance on your current loan if you just make the 60th
(Annuity payments) Ford Motor Company’s current incentives include 4.9 percent APR financing for 60 months or $1,000 cash back on a Mustang. Let’s assume Suzie Student wants to buy the premium Mustang convertible, which costs $25,000, and she has no down payment other than the cash back from
(Annuity payments) Prof. Finance is thinking about trading cars. She estimates she will still have to borrow $25,000 to pay for her new car. How large will Prof. Finance’s monthly car loan payment be if she can get a five-year (60 equal monthly payments) car loan from the VTech Credit Union at
(Related to Checkpoint 6.2 on page 167) (Present value of an annuity) Imagine that Homer Simpson actually invested the $100,000 he earned providing Mr. Burns entertainment five years ago at 7.5 percent annual interest and that he starts investing an additional $1,500 a year today and at the
(Related to Checkpoint 6.1 on page 164) (Annuity payments) Lisa Simpson wants to have $1,000,000 in 45 years by making equal annual end-of-the-year deposits into a taxdeferred account paying 8.75 percent annually. What must Lisa’s annual deposit be?
(Comprehensive problem) Over the past few years, Microsoft founder Bill Gates’net worth has fluctuated between $20 and $130 billion. In early 2006, it was about$26 billion—after he reduced his stake in Microsoft from 21 percent to around 14 percent by moving billions into his charitable
(Components of an annuity payment) You take out a 25-year mortgage for $300,000 to buy a new house. What will your monthly payments be if the interest rate on your mortgage is 8 percent? Use a spreadsheet to calculate your answer. Now, calculate the portion of the 48th monthly payment that goes
That is, no payments are made on annuity at the end of years 1 through 7.Instead, annual payments are made at the end of years 8 through 17.
(Present value of an annuity) Determine the present value of an ordinary annuity of$1,000 per year for 10 years, assuming it earns 10 percent. Assume that the first cash flow from the annuity comes at the end of year 8 and the final payment at the end of year
(Present value of an annuity due) Determine the present value of an annuity due of$1,000 per year for 10 years discounted back to the present at an annual rate of 10 percent. What would be the present value of this annuity due if it were discounted at an annual rate of 15 percent?
(Future value of an annuity) Find the future value at the end of year 10 of an annuity that pays $1,000 per year for 10 years compounded annually at 10 percent. What would be the future value of this annuity if it were compounded annually at 15 percent?
(Related to Checkpoint 6.2 on page 167) (Present value of annuity payments) The state lottery’s million-dollar payout provides for $1 million to be paid over the course of 19 years in amounts of $50,000. The first $50,000 payment is made immediately, and the 19 remaining $50,000 payments occur at
(Components of annuity payments) You’ve just taken on a 20-year, $150,000 mortgage with a quoted interest rate of 6% calling for payments semiannually. How much of your first year’s loan payments (the initial two payments, with the first coming after 6 months have passed, and the second one
(Annuity payments) To buy a new house, you must borrow $150,000. To do this, you take out a $150,000, 30-year, 10% mortgage. Your mortgage payments, which are made at the end of each year (one payment each year), include both principal and 10 percent interest on the declining balance. How large
(Annuity payments) On December 31, Son-Nan Chen borrowed $100,000, agreeing to repay this sum in 20 equal annual installments that include both principal and 15 percent interest on the declining balance. How large will the annual payments be?
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