state H M L 1. The expected payoff of A is: 2. The standard deviation of A is: 3. If the price of A is 3, its expected return is: 4. The covariance between A and B is: Probability A B 0.2 0.5 0.3 с 6 10 6 3 7 12 2 5 14

state H M L 1. The expected payoff of A is: 2. The standard deviation of A is: 3. If the price of A is 3, its expected return is: 4. The covariance between A and B is: Probability A B 0.2 0.5 0.3 с 6 10 6 3 7 12 2 5 14

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 6P

See similar textbooks

Related questions

Q: Fortune Incorporated is preparing its master budget for the first quarter. The company sells a…

A: Working Note#1Computation of sales revenue:Sales revenue=Budgeted units per quarter x Price per…

Q: Problem 07.037 - MIRR calculation For the net cash flow series, find the external rate of return…

A: The MIRR is an improvement over the traditional Internal Rate of Return (IRR) because it addresses…

Q: MNC-D and MNC-Z both require USD82 million for 6 years. Both MNCs have access to different floating…

A: - MNC-D and MNC-Z both require USD 82 million over a six-year period.- MNC-D currently pays a…

Q: You purchased 74 shares of Z stock in January 2008 for $40 per share. Each year you received a cash…

A: Purchase Cost (74*$40)$2,960ADD: Brokerage (2,960*3%)$88.80TOTAL PURCHASE COST.$3,048.80

Q: What is the value on 1/1/16 of the following cash flows? Use a 10% discount rate, and round your…

A: The PV of an investment refers to the collective worth of the cash flows of the investment assuming…

Q: After spending a year and $48,000, you finally have the design of your new product ready. In order…

A: Cash flow refers to the flow of the payments that are received or paid by the entity, it is the…

Q: Auntie Frannie wants to help with tuition for her nieces to attend a private school. She intends to…

A: Auntie Frannie's generosity in contributing to her nieces' education is commendable. To determine…

Q: A payment of $2,800 is due in 2 years and $3,500 is due in 4 years. These two original payments are…

A: Present ValuePresent Value (PV) of a future amount is value of that amount in current time period.…

Q: 2/3 1. by by 2. 2. Explain why choosing a model by maximizing R² or minimizing ô is the same thing.…

A: The first part of the question is asking why maximizing R² or minimizing ô in a model is the same…

Q: A company finances its operations and growth opportunities, using common equity and debt. The…

A: Debt to Equity Ratio = de = 0.3Cost of Equity = ce = 14%Pretax Cost of Debt = cd = 5%Tax Rate = t =…

Q: Andrea is a Partner at KPMG. Her dependent children are interested in technology and sustainability.…

A: In the realm of finance and responsible investing, Andrea, a Partner at KPMG, finds her dependent…

Q: WilliamsF1 just paid a $2.20 dividend but predicts it will be in trouble over the next 5 years with…

A: Implied intrinsic value is helpful in measuring the worth of an asset which is used by investors in…

Q: Assume you are offered a $20,000 annual payment, made quarterly (m =4). Payments begin in 10 years…

A: First Annual Payment: $20,000 (paid quarterly, for a total of $5,000 every quarter).Payment Start…

Q: You are valuing a bank. The bank currently has assets of $305 per share. Five years from now (that…

A: “Since you have posted multiple questions, we will provide the solution only to the first question…

Q: On Monday March 6, 2023 you purchase a $1,000 Treasury bond that matures on May15, 2031 (settlement…

A: Dirty price of bond is the sum of clean price of bond and accrued interest on the date of…

Q: Consider a market value-weighted index consisting of 3 stocks: A, B, and C. The stocks' prices at…

A: StockP0Q0P1Q1P0*Q0P1*Q1A43200452008,6009,000B695005050034,50025,000C11600126006,6007,20049,70041,200

Q: aruk Industries has no cash and a debt obligation of RM36 milllion that is now due. The market value…

A: In a perfect capital market Assets = Liabilities + Equity, based on this equation, we can proceed to…

Q: A loan of X is repaid with level payments of R payable at the end of each year for n years. You are…

A: 1. Year 1 Interest: $797.502. Principal Repaid in Year n-48653. Principal Outstanding at End of Year…

Q: a) A 180% DB switching to Straight Line, 5 years, half year convention, What is the depreciation…

A: The MARCS system has specific depreciation rates for each year of an asset's life.The half-year…

Q: A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3.…

A: Options are market securities which can be purchased or sold in anticipation of the movement of the…

Q: Date Jan. 1, 2005 Feb. 1, 2005 Mar. 1, 2005 Apr. 1, 2005 Jan. 1, 2006 Stock Price (after Event) $100…

A: A stock (also known as a share or equity) represents a fraction of ownership in a company. When you…

Q: Dinklage Corp. has 10 million shares of common stock outstanding. The current share price is $82,…

A: Common Stock :Number of Stocks = 10,000,000Current Selling Price = $82Dividend = $5.4Growth Rate =…

Q: Bond valuation) At the beginning of the year, you bought a $1,000 par value corporate bond with…

A: Coupon = 0.16 * 1,000 = 160Price = Coupon * [ 1-1/(1+ 0.15)^14] / 0.15 + 1,000 / (1 + 0.15)^14= 160…

Q: previous year. The modified duration calculated on January 1, 2014 is X. Given an annual effective…

A: The Annual Effective Rate (AER) is a financial metric used to express the annual interest rate on an…

Q: Your eccentric (and rich uncle) is thrilled that you are pursuing your undergraduate in business…

A: The present value refers to the current value of all the future cash flows. current value can be…

Q: Dividends on CCN corporation are expected to grow at a 9% per year. Assume that the discount rate on…

A: Given:D_1 = $0.50,r=12% or 0.12,g=9% or 0.09.

Q: A bond has $94000 face value and the coupon rate of the bond is 3.4 % (APR), The VTM of the bond is…

A: The fair price of a bond is determined by calculating the present value of its future cash flows.…

Q: Use the financial information given below and develop the NPV of both the lease option. (Alternative…

A: Annual lease payment $ 5,25,000.00Tenure3Initial Investment $ 1,00,000.00Cost of…

Q: what will your interest or finance charges for the month be?

Q: consists of 23% debt and 77% equity. The risk free rate is 4% and the market risk premium is 6%.…

A: Beta shows the risk related to the overall risk of the market and it shows risk and volatility…

Q: A remotely situated fuel cell has an installed cost of $1,900 and will reduce existing surveillance…

A: Present worth of costs (PWC) = $1,900Future worth of benefits (FWB) = $500 * FVAF@ 8% for 15 years +…

Q: 7. Your checkbook shows you have a $10,000 balance in your account. You write checks totaling $4,000…

A: As per guideline if more than one question asked i can solve only one question. Please repost the…

Q: What is the Allocation Effect?

A: The Allocation Effect (sometimes referred to as the Allocation Contribution) in performance…

Q: aa.1 Auto Supply has 54,200 shares of stock outstanding with a par value of $1.00 per share and a…

A: The objective of the question is to find out the par value per share after a two-for-nine reverse…

Q: You purchase a share of Under Armour stock for £50. One year later, after receiving a dividend of…

A: Stock is a capital market security that offers the investor an ownership interest in the company…

Q: slove using excel!!!Groundwater wells are known to begin pumping sand once it becomes exploited…

A: Present value refers to the discounted value of all future cash flows discounted at the cost of…

Q: Compute the discounted payback statistic for Project C if the appropriate cost of capital is 7…

A: YearCash flows Present value @7%Cumulative cash…

Q: When opening a new position on futures contract, a broker requires initial margin of 15% (of the…

A: In a short or sell margin position, there will be gain in case the futures price declines and there…

Q: Road Kill Restaurant had the following account balances. The change in these accounts represents a…

A: Decrease in current assets assets is inflow of cash and increase in current liabilties is also…

Q: First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0501. The…

A: 1-Market value of equity (5.9*34200.6Market value of Debt56.7Total257.32-Beta = Covariance /…

Q: Mr. Jones borrowed P150,000 two years ago. The terms of the loan are 10% interest for 10 years with…

A: Loan installment is that which is paid by borrower to lender for a specified period of time. This…

Q: Bob buys a property that costs $1,000,000. The property is projected to generate NOI as follows:…

A: Property cost = $1,000,000NOI for year 1 = $100,000NOI for year 2 = $105,000NOI for year 3 =…

Q: A farms leverage is 400:20, with price of chickens at k40. a. determine the cost benefit analysis…

A: 1. Farm's leverage: 400:202. Price of chickens: K40 (assuming 'K' is the currency)

Q: Question 2. A company makes payments continuously at a rate of $200 per year. The payments are made…

A: Annual payment = $200Annual interest rate = 6.5%Future value period = 10 Years

Q: Given that the firm has a value of $1,196,428.57 when it is all equity, what will be the value of…

A: Value of firm with debt (Value of Levered firm) = Value of unlevered firm +Tax rate * The amount of…

Q: Logan Company had sales last year of $1,000. For the past 5 years, Logan has done business out of 20…

A: Last year sales from 20 locations = $1,000Sales growth rate per year = 10%hence>Forecast sales…

Q: Jackson is 18 years old and has a dog-sitting business. Calculate the 2022 standard deduction…

A: Situation a) - Dog sitting earnings: $2,000- $300 in interest income - Jackson is a dependent.…

Q: The MillerCorp would like to acquire its competitor, the ModiglianiCorp. To pay for the acquisition…

A: We will use an excel spreadsheet as per the table given in the question. Please refer to the same…

Q: Use the Black-Scholes formula to find the value of a call option based on the following inputs.…

A: A call option is a derivative instrument that allows the holder to purchase the related asset at a…

Q: what is the bond's approximate modified duration

Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Consider the following securities:
state Probability A B
A B
H
M
L
0.2
0.5
0.3
с
6 10 6
3 7 12
2 5
14
1. The expected payoff of A is:
2. The standard deviation of A is:
3. If the price of A is 3, its expected return is:
4. The covariance between A and B is:
5. The correlation coefficient between A and B is:
6. Is it possible to build a portfolio that has zero variance using A and C? YES/ NO

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Define=standard deviation

VIEW

Step 2: Calculation of expected payoff

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 4 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

There are two assets 1 and 2, with returns X and Y correspondingly. Return X is a random variable with mean 1 and variance 1; return Y is a random variable with mean 1 and variance 3. We know that the expectation of X*Y is equal to 0. Find the share of asset 1 in the risk-minimizing portfolio.
Consider two assets. Suppose that the return on asset 1 has expected value 0.05 and standard deviation 0.1 and suppose that the return on asset 2 has expected value 0.02 and standard deviation 0.05. Suppose that the asset returns have correlation 0.4.Consider a portfolio placing weight w on asset 1 and weight 1-w on asset 2; let Rp denote the return on the portfolio. Find the mean and variance of Rp as a function of w.
Mean-variance expected utility is given by Eu = e-, where e is expected return, v is the variance of the portfolio and tis risk tolerance. Suppose an investor has risk-loving preferences. What can we say about the value of t? Select one: Ot1 O. t>0 O t=0
5. Consider the portfolios constructed from the two risky securities with expected returns, standard deviations of returns, and correlation between returns given in the following table. |1=0.10 M2 = 0.15 01 = = 0.28 02 = 0.24 P12 = -0.10 Find the equation of the minimum variance line w = μa + b.
(Singular) Suppose there are two stocks that are uncorrelated. Each of these has variance of 1, and there are expected returns are 7₁ and 72, respectively. The risk-free rate is rf. Find the portfolio of weights w₁ and w2 for the Markowitz (market) portfolio. Show that for some value of rf there is no Markowitz portfolio.
The market has three risky assets. The variance-covariance matrix of the risky assets are as follows: r1 r2 r3 r1 0.25 0 -0.2 r2 0 4 0.1 r3 -0.2 0.1 1 Assume the market portfolio is M = 0.2 ◦ r1 + 0.5 ◦ r2 + 0.3 ◦ r3. Further assume E(rM) = 0.08. (1) What is the variance of M?(2) What is the covariance of r2 and M?(3) What is β2?(4) If the rate of return of the risk-free asset is 0.02. Then what is the fair expected rate of return of security 2?(5) An investor wants to invest in a portfolio P = 0.4◦r1+0.6◦r3. What is its “fair” expected rate of return?
Consider a portfolio formed of two risky assets whose returns have a correlation of 0.5. What can be said of the standard deviation of the global minimum-variance portfolio formed with these two risky assets? It's greater than zero. It s equal to zero. O It s between - 1 and +1. O It's the weighted average of the standard deviations of the two risky assets.
Expected retun and standard deviation. Use the following information to answer the questions: a. What is the expected return of each asset? b. What is the variance and the standard deviation c. What is the expected return of a portfolio with 1 1 Data Table d. What is the portfolio's variance and standard de - X Hint Make sure to round all intermediate calculatio Swers yo (Click on the following icon D in order to copy its contents into a spreadsheet.) a. What is the expected return of asset J? (Round to four decimal places.) Return on Return on Return on Probability of State State of Asset J in Asset Kin State 0.200 0.140 0.040 Asset L in Economy State State Вoom 0.28 0.070 0.260 0.180 Growth 0.37 0.25 0.070 Stagnant 0.070 0.060 -0.210 Recession 0.10 0.070 -0.100 Print Done
3) If two securities are perfectly negatively correlated then the global-minimum variance portfolio has a standard deviation that is always A) greater than zero. B) equal to zero. C) equal to the sum of the securities' standard deviations. D) equal to −1. Choose the correct answer and justify it.
5. There are three risky assets with rates of return r₁, 12, and r3, respectively. The covariance matrix and the expected rates of return are [0.4 0.2 0 = Σ 0.2 0.4 0.2 0 0.2 0.4 [0.04] 0.08 0.06 (a) Find the global minimum-variance portfolio. (b) For the required return z = 0.075, find (the weight of) the optimal portfolio with risky assets. For (c) and (d) only, assume there is an additional risk-free asset with return Tf 0.03. = (c) Find the tangent portfolio.
Suppose you create a portfolio with two securities: Security Security Weight (%) Security Variance (%) X 70 18 Y 30 22 If the correlation coefficient between the two securities is -0.2, what is the standard deviation of the portfolio？
The variance (risk) of an N-asset portfolio can be written as: o² = 2 + 2/11 -Cov where o² is the average variance of stocks in the portfolio and Cov is the average covariance between each pair of stocks in the portfolio. This result suggests that a well-diversified portfolio with a sufficiently large number of stocks will have O a zero total risk (variance) a zero covariance with other assets a zero diversifiable (nonsystematic) risk a zero market (systematic) risk