Suppose Vanguard offers a market portfolio with positive expected return. Warren Buffett signed a contract with his two successors. The contract defines that the bonus of his successors in 2013 is determined by $0.1 Billion times the difference between their portfolio return and Vanguard’s market portfolio return in that same year.   Question 31   What would be a better contract if CAPM is the correct model?   Bonus can only be positive when the CAPM alpha is positive   Bonus should not be correlated with the CAPM alpha   Bonus can only be positive when the CAPM alpha is negative

Q: Question 10 Finneas the financial analyst believes to have found the optimal risk portfolio (denoted…

A: The expected return on a portfolio or security is defined as the income an investor earns when they…

Q: Suppose your firm is considering investing in a project with the cash flows shown below, that the…

A: NPV can be calculated by following function in excel =NPV(rate,value1,[value2],…) + Initial…

Q: Assume both portfolios A and B are well diversified, that E(A) = 14.8% and Erg) = 15.8%. If the…

A: Given:E(ra​)=14.8%E(rb​)=15.8%βa​=1βb​=1.1

Q: The capital asset pricing model tells us that a security with a beta of 2 will be expectedto yield a…

A: Detailed ExplanationThe statement is not entirely accurate. The Capital Asset Pricing Model (CAPM)…

Q: Given the following variables: S = $50, E = $45, T = 1 year, r = 2 %, and P = $5; if the call option…

A: Given, Stock price (S) = $50 Strike price (E) = $45 T = 1 year r = 2% Put price (P) = $5

Q: Suppose that the risk-free rate is 3.00% per annum. In addition, assume that the market portfolio…

A: Since you have posted a question with multiple sub-parts, we will solve the first three sub- parts…

Q: The continuously compounded interest rate on 5-year default-free Australian dollar-denominated bonds…

A: Hello. Since your question has multiple parts, we will solve the first question for you. If you want…

Q: A project under consideration has an internal rate of return of 13% and a beta of 0.8. The risk-free…

A: CAPM is the model of valuing the required rate of return an investor wants from a company, It is the…

Q: What is the required rate of return on the project? (De

A: Capital Asset Pricing Model (CAPM) is a measure used for the measurement of systematic risk. It…

Q: A good approximation to use for the return on an average-risk project would be today’s interest rate…

A: A risk premium is the additional return or compensation that an investor demands for taking on…

Q: Suppose your firm is considering investing in a project with the cash flows shown below, that the…

A: Initial cost (I) = 1010Maximum allowable payback period = 2 yearsPayback period = ?Payback period is…

Q: Consider the one-period binomial model with a single risky asset with current price 33. Its price at…

A: Current price (S) = 33 Up price after 1 period (Su) = 35 Down price after 1 period (Sd) = 33 r =…

Q: 5. a. b. C. d. e. Suppose that two firms, A and B, are considering the same project which has the…

A: Frist we need to calculate expected rate of return by using CAPM.The equation under CAPM is given…

Q: A project under consideration has an internal rate of return of 13% and a beta of 0.6. The risk-free…

A: The CAPM model refers to the relationship between the expected return and the risk associated with…

Q: This is part a) question and it's answer in order to answer part b) question Question: You hold a…

A: Coupon received in perpetuity=CCurrent interest rate= iSo, price of bond=Coupon Interest ratein next…

Q: Betas Answer the questions beiow for assets A to D shown in the following table. Asset Beta so B…

A: Note: Hi! Thank you for the question, As per the honor code, we are allowed to answer three…

Q: assume that the risk free interest rate is 3%, the market rate of return is 7% and the beta for the…

A: As per CAPM, Required rate of return = Risk free Rate + Beta * (Market Return - Risk free Rate)

Q: If the return on the risk-free asset is 2.25% (Rf = 2.25%) and the market return is 6.50% (Rm =…

A: Beta shows magnitude of systematic risk related to stock. It shows volatility in stock returns over…

Q: Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has…

A: SML means security market line. CAPM means capital asset pricing model.

Q: Historically, DeSoto projects have had an average beta of 1.25, which indicates the higher risk…

A: The question can be answered by determining the required return for the "average" DeSoto project…

Q: What is the shape of the yield curve given the term structure below? What expectations are investors…

A: Yield Curve: The yield curve plots the different interest rates and maturities of bonds. It acts as…

Q: uppose that a two-factor model, where the factors are the market return (Factor 1) and the rowth…

A: As per 2 factor Arbitrage Pricing Theory,  Expected Return = Rf + ( b1f1) + (b2f2) Where, Rf = Risk…

Q: Consider an economy with three states which occur with probability (0.2, 0.2, 0.6). Suppose a firm…

A: CAPM means Capital Assets Pricing Model. The formula for CAPM is: E(r)=Rf+beta(Rm-Rf) NPV is the…

Q: (Capital Asset Pricing​ Model)  The expected return for the general market is 10.5 ​percent, and the…

A: The capital asset pricing model is a risk adjusted model which will be helpful in finding out the…

Q: Suppose your firm is considering investing in a project with the cash flows shown below, that the…

A: A method of capital budgeting that helps to evaluate the present worth of cash flow and a series of…

Q: Given the following information, predict the European call option's new price after the risk free…

A: Utilizing the Black-Scholes option pricing model and the idea of rho, we will be able to make an…

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.