a.
Adequate information:
| State | Probability of Outcome | Return on Security 1 | Return on Security 2 | Return on Security 3 |
| 1 | 0.15 | 0.20 | 0.20 | 0.05 |
| 2 | 0.35 | 0.15 | 0.10 | 0.10 |
| 3 | 0.35 | 0.10 | 0.15 | 0.15 |
| 4 | 0.15 | 0.05 | 0.05 | 0.20 |
To compute: The expected return and standard deviation of Security 1, Security 2, and Security 3.
Introduction: Expected return simply refers to the return that is anticipated on the investment.
b.
Adequate information:
| State | Probability of Outcome | Return on Security 1 | Return on Security 2 | Return on Security 3 |
| 1 | 0.15 | 0.20 | 0.20 | 0.05 |
| 2 | 0.35 | 0.15 | 0.10 | 0.10 |
| 3 | 0.35 | 0.10 | 0.15 | 0.15 |
| 4 | 0.15 | 0.05 | 0.05 | 0.20 |
To compute: The covariance and correlations between the securities.
Introduction: The relationship between two securities is referred to as covariance.
c.
Adequate information:
| State | Probability of Outcome | Return on Security 1 | Return on Security 2 | Return on Security 3 |
| 1 | 0.15 | 0.20 | 0.20 | 0.05 |
| 2 | 0.35 | 0.15 | 0.10 | 0.10 |
| 3 | 0.35 | 0.10 | 0.15 | 0.15 |
| 4 | 0.15 | 0.05 | 0.05 | 0.20 |
Weight of security 1 (W1) = 50% or 0.50
Weight of security 2 (W2) = 50% or 0.50
Expected return of Security 1 [E(R1)] = 0.1250 or 12.50%
Expected return of Security 2 [E(R2)] = 0.1250 or 12.50%
Standard deviation of Security 1 (σ1) = 0.0461 or 4.61%
Standard deviation of Security 2 (σ2) = 0.0461 or 4.61%
Correlation between Security 1 and Security 2 (?1,2) = 0.59
To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and a half in Security 2.
Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.
d.
Adequate information:
| State | Probability of Outcome | Return on Security 1 | Return on Security 2 | Return on Security 3 |
| 1 | 0.15 | 0.20 | 0.20 | 0.05 |
| 2 | 0.35 | 0.15 | 0.10 | 0.10 |
| 3 | 0.35 | 0.10 | 0.15 | 0.15 |
| 4 | 0.15 | 0.05 | 0.05 | 0.20 |
Weight of security 1 (W1) = 50% or 0.50
Weight of security 3 (W3) = 50% or 0.50
Expected return of Security 1 [E(R1)] = 0.1250 or 12.50%
Expected return of Security 2 [E(R3)] = 0.1250 or 12.50%
Standard deviation of Security 1 (σ1) = 0.0461 or 4.61%
Standard deviation of Security 2 (σ3) = 0.0461 or 4.61%
Correlation between Security 1 and Security 3 (?1,3) = -1
To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and half in Security 3.
Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.
e.
Adequate information:
| State | Probability of Outcome | Return on Security 1 | Return on Security 2 | Return on Security 3 |
| 1 | 0.15 | 0.20 | 0.20 | 0.05 |
| 2 | 0.35 | 0.15 | 0.10 | 0.10 |
| 3 | 0.35 | 0.10 | 0.15 | 0.15 |
| 4 | 0.15 | 0.05 | 0.05 | 0.20 |
Weight of security 2 (W2) = 50% or 0.50
Weight of security 3 (W3) = 50% or 0.50
Expected return of Security 2 [E(R2)] = 0.1250 or 12.50%
Expected return of Security 3 [E(R3)] = 0.1250 or 12.50%
Standard deviation of Security 2 (σ2) = 0.0461 or 4.61%
Standard deviation of Security 3 (σ3) = 0.0461 or 4.61%
Correlation between Security 2 and Security 3 (?2,3) = -0.59
To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 2 and a half in Security 3.
Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.
f.
Adequate information:
| State | Probability of Outcome | Return on Security 1 | Return on Security 2 | Return on Security 3 |
| 1 | 0.15 | 0.20 | 0.20 | 0.05 |
| 2 | 0.35 | 0.15 | 0.10 | 0.10 |
| 3 | 0.35 | 0.10 | 0.15 | 0.15 |
| 4 | 0.15 | 0.05 | 0.05 | 0.20 |
To compute: About diversification by considering Parts (a), (c), (d), (e).
Introduction: Correlation defines how two or more securities in the portfolio are related to each other.
Want to see the full answer?
Check out a sample textbook solution
Chapter 11 Solutions
CORPORATE FINANCE - CONNECT ACCESS
- Hello expert Give the answer please general accountingarrow_forwardScenario 2: The homepage for Coca-Cola Company can be found at coca-cola.com Links to an external site.. Locate the most recent annual report, which contains a balance sheet for the company. What is the book value of equity for Coca-Cola? The market value of a company is (# of shares of stock outstanding multiplied by the price per share). This information can be found at www.finance.yahoo.com Links to an external site., using the ticker symbol for Coca-Cola (KO). What is the market value of equity? Which number is more relevant to shareholders – the book value of equity or the market value of equity?arrow_forwardFILE HOME INSERT Calibri Paste Clipboard BIU Font A1 1 2 34 сл 5 6 Calculating interest rates - Excel PAGE LAYOUT FORMULAS DATA 11 Α΄ Α΄ % × fx A B C 4 17 REVIEW VIEW Alignment Number Conditional Format as Cell Cells Formatting Table Styles▾ Styles D E F G H Solve for the unknown interest rate in each of the following: Complete the following analysis. Do not hard code values in your calculations. All answers should be positive. 7 8 Present value Years Interest rate 9 10 11 SA SASA A $ 181 4 $ 335 18 $ 48,000 19 $ 40,353 25 12 13 14 15 16 $ SA SA SA A $ Future value 297 1,080 $ 185,382 $ 531,618arrow_forward
- B B Canning Machine 2 Monster Beverage is considering purchasing a new canning machine. This machine costs $3,500,000 up front. Required return = 12.0% Year Cash Flow 0 $-3,500,000 1 $1,000,000 2 $1,200,000 3 $1,300,000 4 $900,000 What is the value of Year 3 cash flow discounted to the present? 5 $1,000,000 Enter a response then click Submit below $ 0 Submitarrow_forwardFinances Income Statement Balance Sheet Finances Income Statement Balance Sheet Materia Income Statement Balance Sheet FY23 FY24 FY23 FY24 FY23 FY24 Sales Cost of Goods Sold 11,306,000,000 5,088,000,000 13,206,000,000 Current Current Assets 5,943,000,000 Other Expenses 4,523,000,000 5,283,000,000 Cash 211,000,000 328,600,000 Liabilities Accounts Payable 621,000,000 532,000,000 Depreciation 905,000,000 1,058,000,000 Accounts 502,000,000 619,600,000 Notes Payable 376,000,000 440,000,000 Earnings Before Int. & Tax 790,000,000 922,000,000 Receivable Interest Expense 453,000,000 530,000,000 Total Current Inventory 41,000,000 99,800,000 997,000,000 972,000,000 Taxable Income 337,000,000 392,000,000 Liabilities Taxes (25%) 84,250,000 98,000,000 Total Current 754,000,000 1,048,000,000 Long-Term Debt 16,529,000,000 17,383,500,000 Net Income Dividends 252,750,000 294,000,000 Assets 0 0 Fixed Assets Add. to Retained Earnings 252,750,000 294,000,000 Net Plant & 20,038,000,000 21,722,000,000…arrow_forwardDo you know what are Keith Gill's previous projects?arrow_forward
- Explain why long-term bonds are subject to greater interest rate risk than short-term bonds with references or practical examples.arrow_forwardWhat does it mean when a bond is referred to as a convertible bond? Would a convertible bond be more or less attractive to a bond holder than a non-convertible bond? Explain in detail with examples or academic references.arrow_forwardAlfa international paid $2.00 annual dividend on common stock and promises that the dividend will grow by 4% per year, if the stock’s market price for today is $20, what is required rate of return?arrow_forward
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT