You are going to allocate capital into safe and risky assets. The risky asset will earn 200% returnif the economy is good (with a 55% chance). If, otherwise, it will lose 60% of the investment principal.States ofRate ofProb.natureReturnAccording to the Kelly's criterion, how much do you have to allocate for the risky asset to maximizefinal wealth? (The safe asset earns zero return.) → (1) 35%; (2) 47%; (3) 59%; (4) 65%;1Good55%200%your|(5) 69%; (6) 75%; (7) 85%; (8) 97%; (9) 102%; (10) 114%; (11) 115%;Bad45%-60%

Kelly criterion is a formula used by mostly investors to decide how much money should be allocated…

You are going to allocate capital into safe and risky assets. The risky asset will earn 200% return if the economy is good (with a 55% chance). If, otherwise, it will lose 60% of the investment principal. According to the Kelly's criterion, how much do you have to allocate for the risky asset to maximize your final wealth? (The safe asset earns zero return.) → (1) 35%; (2) 47%; (3) 59%; (4) 65%; States of Rate of Prob. nature Return Good 55% 200% Dad 1500 GO0

You are going to allocate capital into safe and risky assets. The risky asset will earn 200% return if the economy is good (with a 55% chance). If, otherwise, it will lose 60% of the investment principal. According to the Kelly's criterion, how much do you have to allocate for the risky asset to maximize your final wealth? (The safe asset earns zero return.) → (1) 35%; (2) 47%; (3) 59%; (4) 65%; States of Rate of Prob. nature Return Good 55% 200% Dad 1500 GO0

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Kiley Electronics is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital (and even negative), in which case it will be rejected. r: 10.00% Year 0 1 2 3 Cash flows −$1,000 $550 $560 $570
A firm has the following investment alternatives (refer to image): Each investment costs $3,000; investments B and C are mutually exclusive,and the firm’s cost of capital is 8 percent. a.) According to the internal rates of return, which investment(s) should the firm make? Why? b.) According to both the net present values and internal rates of return, which investments should the firm make? c.) If the firm could reinvest the $3,600 earned in year 1 from investment B at 10 percent, what effect would that information have on your answer to part b? Would the answer be different if the rate were 14 percent?
Two investments, A and B, cost the same but have different cash flows. The IRR for Investment A is 24% while the IRR for Investment B is 19%. If a required return of 16% is used, however, the NPVs of the two investment are the same. What is the range of required returns in which: a. You would choose A over B? c. You would choose B over A?
Finance
5) Brady Brand is evaluating a project with the given cash flow and weighted average cost of capital (WACC) information. Can you determine the project's modified internal rate of return (MIRR)? Keep in mind that the MIRR can be lower than the WACC, or even negative, indicating that the project is not viable and should be rejected. WACC: 10.00% Year Cash flows 0 1 -$850 $300 2 $320 3 $340 4 $360
4. Present value Finding a present value is the reverse of finding a future value. is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future. Which of the following investments that pay will $10,500 in 13 years will have a lower price today? O The security that earns an interest rate of 21.75%. O The security that earns an interest rate of 14.50%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 13.80%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price? O An investment that matures in three years An investment that matures in four years Which of the following is true about present value calculations? O Other things remaining equal, the present value of a future cash flow increases if the investment time period…
Problem #2: Consider an investment where the cash flows are: - $920.33 at time 1 = 0 (negative since this is your initial investment) S407 at time = 1 in years $222 at time = 2 in years $426 at time = 3 in years (a) Use Excel's "Solver" to find the internal rate of return (IRR) of this investment. Take a screen shot showing Solver open with your entries for the function clearly visible. Paste the screen shot into an application (like Paint), and save it as a (.png) file. Upload your screenshot below. (b) What is the value of IRR found by Solver?
Am. 121.
You have an opportunity to invest $50,600 now in return for $60,800 in one year. If your cost of capital is 7.9%, what is the NPV of this investment?
You are considering a risky investment that you expect will either be worth 115,000 in 1 year, or 65,000, with probabilities of 0.65 and 0.35 for each outcome, respectively. You could invest in riskless T-bills at 0.058. If you invest in this risky investment, you would expect to earn a risk premium of 0.091 Given this information, what would you be willing to pay for this investment? 84,856 78,059 79,001 73,655 82,693
A risky $420,000 investment is expected to generate the following cash flows: Year 1 2 3 4$ 102,700 $ 163,030 $ 160,824 $ 135,200 If the firm’s cost of capital is 12 percent, should the investment be made?. Use a minus sign to enter a negative value, if any. Round your answer to the nearest dollar.NPV: $ Should The investment be made? An alternative use for the $420,000 is a four-year U.S. Treasury bond that pays $25,200 annually and repays the $420,000 at maturity. Management believes that the cash inflows from the risky investment are equivalent to only 70 percent of the certain investment, which pays 6 percent. Should the investment be made? Use Appendix B to answer the question. Do not round other intermediate calculations. NPV: $ Should The investment be made?
1. Find the Present Worth (PW), the Future Worth (FW), the Annual Worth (AW), and the simple payback period of the following cash flow at a Minimum Attractive Rate of Return (MARR) of 10%: Year 0 – spend $50,000; Years 1 through 6 make $12,000, and in Year 6 sell all of the left-over stuff for an additional $5,000. Do not forget you can always use FW = PW(F/P,i,n) and AW = PW(A/Pi,n). Also do not forget that if one is positive then they all are positive or if one is negative then they all are negative. Answer: PW = $5,085, payback = 5 years 2. Is the project in #1 a good project? Answer: What do the "goodness" indicators show (PW, FW, AW) > 0, payback period OK? 3. If MARR in problem #1 is 15% what is the PW and is this a good project? Answer: Has PW (and also FW and AW) etc. changed sign

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