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BUSFIN 4220 Study Guide - Midterm Guide: United States Treasury Security, Investment, Market Risk

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mauvepug886
30 Oct 2014
School
Ohio State University
Department
Business Admin : Finance
Course
BUSFIN 4220
Professor
All

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Document Summary

Rate of total return = dividend yield + capital gains yield. Capital gains yield is simply the change in price during the year. 0. 082 = (40 price today) / price today. The best stock to add to a portfolio is the one with the largest negative correlation with the portfolio"s returns. This will cause the greatest compression of portfolio returns, further reducing the portfolio"s standard deviation and risk. The minimum rate of return that adequately compensates an investor for bearing market risk is the capm return. Capm return = 3% + 1. 2 (9%) = 13. 8% Notice that the problem provides the market risk premium, not the return on the market, so you do not need to subtract the 3% risk-free rate from the 9% market measure. Stocks that plot above the sml offer a higher rate of return for the risk taken (as measured by beta).

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Related Questions

After selling 12.75 million shares in Alibaba’s IPO founder Jack Ma received $867m which he wishes to invest wisely. He has contacted three young and very eager investment managers to research the market opportunities and propose an optimal investment portfolio. The best candidate will have the chance to become Ma’s wealth manager. Ma will not hire candidates that propose either inefficient or infeasible portfolios. Assume that all securities are priced according to the CAPM and that the risk free rate is 2%. The expected excess return on the market portfolio is 8% and the standard deviation is 20%. The three candidates proposed portfolios with the following characteristics: Expected Return Standard Deviation Candidate: Bo Expected Return: 8% Standard Deviation: 10% Candidate: Michael Expected Return: 12% Standard Deviation: 25% Candidate: Aditi Expected Return: 13% Standard Deviation: 30% 1. Who do you think will be hired by Ma and why? 2. How can the expected return of the wining portfolio be achieved? Specify the amount invested in each asset/portfolio of assets? 3. What is the beta of the winning portfolio? 4. If Ma holds his position for one year what is the total amount of money he expects to earn on his investment? Show all of your calculations and explain your approach.

One year ago Carson Industries issued a 10-year, 14% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,070, and it now sells for $1,280.

A. What is the current yield? Round to two decimal places.

B.Is this yield affected by whether the bond is likely to be called?

I. If the bond is called, the current yield will remain the same but the capital gains yield will be different.

II. If the bond is called, the current yield and the capital gains yield will remain the same.

III. If the bond is called, the capital gains yield will remain the same but the current yield will be different.

IV. If the bond is called, the current yield and the capital gains yield will both be different.

V. If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different.

C. What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calcuation, if reqired. Round your answer to two decimal places. Enter a loss percentage, if any, with a minus sign.

Is this yield dependent on whether the bond is expected to be called?

I. If the bond is not expected to be called, the appropriate expected total return is the YTC.

II. If the bond is expected to be called, the appropriate expected total return will not change.

III. The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.

IV. The expected capital gains (or loss) yield for the coming year does not depend on whether or not the bond is expected to be called.

V.If the bond is expected to be called, the appropriate expected total return is the YTM.

Conroy Consulting Corporation (CCC) has been growing at a rate of 14% per year in recent years. This same non-constant growth rate is expected to last for another 2 years (g0,1 = g1,2 = 14%). If D0= $1.70, rs= 9% and gL = 6%, then what is CCC's stock worth today? Round your answer to the nearest cent. Do not round your intermediate computations. $ What is its expected dividend yield at this time? Round the answer to two decimal places. Do not round your intermediate computations. % What is its capital gains yields at this time? Round the answer to two decimal places. Do not round your intermediate computations. % Now assume that CCC's period of supernormal growth is to last another 5 years rather than 2 years (g0,1 = g1,2 = g2,3 = g3,4 = g4,5 = 14%). How would this affect its price, dividend yield, and capital gains yield? I.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. II.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. III.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will remain the same for the duration of the supernormal growth period. IV.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. V.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. What will CCC's dividend yield and capital gains yield be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth, and the calculations are very easy.) Round the answers to two decimal places. Do not round your intermediate computations. Dividend yield % Capital gains yield % Of what interest to investors is the relationship over time between dividend yield and capital gains yield? I.It is of no interest to investors whether they receive dividend income or capital gains income, since both types of income are always taxed at the same rate. II.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income must be paid in the current year. III.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income can be delayed until the stock is sold. IV.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized. V.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the capital gain during the year, while taxes on the dividends can be delayed until the stock is sold.