On a market at equilibrium stocks A (B-1.2) and B (B=0.7) offer returns of 15% and 10%, respectively. The standard deviation of the market index is 25%. An investor with a total budget of 120000 lei will buy 960 A shares for 48000 lei, 3600 B shares for 36000 lei, the difference being invested in stock C. The specific risk of this portfolio is zero and the variance of portfolio's returns is 8.1225%. a. Compute the rate of return on the portfolio b. The manager of company A decides to invest 40% of the annual EPS in projects that generate a return of 20% per year. EPS is in value of 10 lei. How will the price of the stock change? c. The manager of company B will implement a project that demands for an investment of 3.5 lei per share and generates over the next 20 years cash-flows of 1.1 lei per share. What is the impact on the stock's price?

On a market at equilibrium stocks A (B-1.2) and B (B=0.7) offer returns of 15% and 10%, respectively. The standard deviation of the market index is 25%. An investor with a total budget of 120000 lei will buy 960 A shares for 48000 lei, 3600 B shares for 36000 lei, the difference being invested in stock C. The specific risk of this portfolio is zero and the variance of portfolio's returns is 8.1225%. a. Compute the rate of return on the portfolio b. The manager of company A decides to invest 40% of the annual EPS in projects that generate a return of 20% per year. EPS is in value of 10 lei. How will the price of the stock change? c. The manager of company B will implement a project that demands for an investment of 3.5 lei per share and generates over the next 20 years cash-flows of 1.1 lei per share. What is the impact on the stock's price?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P

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