You wish to calculate the risk level of your portfolio based on its beta. The five stocks in the portfolio with their respective weights and betas are shown in the accompanying table. Calculate the beta of your portfolio.
Stock portfolio weight Beta
Alpha 20% 1.15
Centauri 10 0.85
Zen 15 1.60
Wren 20 1.35
Yukos 35 1.85
Click here for the solution: You wish to calculate the risk level of your portfolio based on its beta
Showing posts with label risk. Show all posts
Showing posts with label risk. Show all posts
Saturday, August 22, 2015
(Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects
(Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects, A through E, using the capital asset pricing model (CAPM) and its graphical representation, the security market line (SML). Relevant information is presented in the following table.
Item Rate of return Beta,b
Risk-free asset 9% 0.00
Market portfolio 14 1.00
Project A __ 1.50
Project B ___ 0.75
Project C ___ 2.00
Project D ___ 0.00
Project E ___ -0.50
a. Calculate (1) the required rate of return and (2) the risk premium for each project, given its level of nondiversifiable risk.
b. Use your findings in part a to draw the security, market line (required return relative to nondiversifiable risk).
c. Discuss the relative nondiversifiable risk of projects A through E
d. Assume that recent economic events have caused investors to become less risk- averse, causing the market return to decline by 2%, to 12%. Calculate the new required returns for assets A through E, and draw the new security market line on the same set of axes that you used in part b.
e. Compare your findings in part a and b with those in part d. What conclusion can you draw about the impact of a decline in investor risk aversion on the required returns of risky assets?
Click here for the solution: (Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects
Item Rate of return Beta,b
Risk-free asset 9% 0.00
Market portfolio 14 1.00
Project A __ 1.50
Project B ___ 0.75
Project C ___ 2.00
Project D ___ 0.00
Project E ___ -0.50
a. Calculate (1) the required rate of return and (2) the risk premium for each project, given its level of nondiversifiable risk.
b. Use your findings in part a to draw the security, market line (required return relative to nondiversifiable risk).
c. Discuss the relative nondiversifiable risk of projects A through E
d. Assume that recent economic events have caused investors to become less risk- averse, causing the market return to decline by 2%, to 12%. Calculate the new required returns for assets A through E, and draw the new security market line on the same set of axes that you used in part b.
e. Compare your findings in part a and b with those in part d. What conclusion can you draw about the impact of a decline in investor risk aversion on the required returns of risky assets?
Click here for the solution: (Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects
Friday, August 14, 2015
Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts
10. Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts:
Cash = $5 million
Government securities = $7 million
Mortgage loans = $30 million
Other loans = $50 million
Fixed assets = $10 million
Intangible assets = $4 million
Loan-loss reserves = $5 million
Owners’ equity = $5 million
Trust-preferred securities = $3 million
Cash assets and government securities are not considered risky. Loans secured by real estate have a 50 percent weighting factor. All other loans have a 100 percent weighting factor in terms of riskiness.
a. Calculate the equity capital ratio.
b. Calculate the Tier 1 Ratio using risk-adjusted assets.
c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio using risk-adjusted assets.
Click here for the solution: Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts
Cash = $5 million
Government securities = $7 million
Mortgage loans = $30 million
Other loans = $50 million
Fixed assets = $10 million
Intangible assets = $4 million
Loan-loss reserves = $5 million
Owners’ equity = $5 million
Trust-preferred securities = $3 million
Cash assets and government securities are not considered risky. Loans secured by real estate have a 50 percent weighting factor. All other loans have a 100 percent weighting factor in terms of riskiness.
a. Calculate the equity capital ratio.
b. Calculate the Tier 1 Ratio using risk-adjusted assets.
c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio using risk-adjusted assets.
Click here for the solution: Let’s assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts
Thursday, August 13, 2015
Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity
Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table.
Project A Project B
Initial Investment(CF) $80,000 $50,000
Year Cash Inflows(CF)
1 15,000 15,000
2 20,000 15,000
3 25,000 15,000
4 30,000 15,000
5 35,000 15,000
a. Calculate each project's payback period
b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.
Click here for the solution: Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity
Project A Project B
Initial Investment(CF) $80,000 $50,000
Year Cash Inflows(CF)
1 15,000 15,000
2 20,000 15,000
3 25,000 15,000
4 30,000 15,000
5 35,000 15,000
a. Calculate each project's payback period
b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.
Click here for the solution: Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity
Sunday, July 19, 2015
What is the risk to shareholders of blindly granting these proxies?
The management of corporations frequently solicit proxies for a management-supported board of directors. What is the risk to shareholders of blindly granting these proxies?
Click here for the solution: What is the risk to shareholders of blindly granting these proxies?
Click here for the solution: What is the risk to shareholders of blindly granting these proxies?
Tuesday, July 7, 2015
Recalling the definitions of risk premiums from Chapter 8 and using the Treasury bill return in Table 12.4 as an approximation to the nominal risk-free rate
P12-3 Recalling the definitions of risk premiums from Chapter 8 and using the Treasury bill return in Table 12.4 as an approximation to the nominal risk-free rate, what is the risk premium from investing in each of the other asset classes listed in Table 12.4?
Click here for the solution: Recalling the definitions of risk premiums from Chapter 8 and using the Treasury bill return in Table 12.4 as an approximation to the nominal risk-free rate
Click here for the solution: Recalling the definitions of risk premiums from Chapter 8 and using the Treasury bill return in Table 12.4 as an approximation to the nominal risk-free rate
Profits and Losses from Straddles: Julian Herrara, a sophisticated investor who is both willing and able to take risk, has just noticed that Go-West Airlines has become the target of a hostile takeover
Profits and Losses from Straddles:
Julian Herrara, a sophisticated investor who is both willing and able to take risk, has just noticed that Go-West Airlines has become the target of a hostile takeover. Prior to the announcement of the offer to purchase the stock for $72 a share, the stock had been selling for $59. Immediately after the offer the stock rose to $75, a premium over the offer price.
AND SO ON
Construct Herrara’s profit profiles and answer the following questions.
1. What strategy works best if a bidding war erupts?
2. What strategy works best if the hostile takeover is defeated?
3. Which strategy works best if the original offer price becomes the final price?
4. Which of the three positions produces the worst result and under what condition does it occur?
5. If you were Herrara’s financial advisor, which strategy would you advise he establish? Or would you argue that he not speculate on this takeover?
Click here for the solution: Profits and Losses from Straddles: Julian Herrara, a sophisticated investor who is both willing and able to take risk, has just noticed that Go-West Airlines has become the target of a hostile takeover
Julian Herrara, a sophisticated investor who is both willing and able to take risk, has just noticed that Go-West Airlines has become the target of a hostile takeover. Prior to the announcement of the offer to purchase the stock for $72 a share, the stock had been selling for $59. Immediately after the offer the stock rose to $75, a premium over the offer price.
AND SO ON
Construct Herrara’s profit profiles and answer the following questions.
1. What strategy works best if a bidding war erupts?
2. What strategy works best if the hostile takeover is defeated?
3. Which strategy works best if the original offer price becomes the final price?
4. Which of the three positions produces the worst result and under what condition does it occur?
5. If you were Herrara’s financial advisor, which strategy would you advise he establish? Or would you argue that he not speculate on this takeover?
Click here for the solution: Profits and Losses from Straddles: Julian Herrara, a sophisticated investor who is both willing and able to take risk, has just noticed that Go-West Airlines has become the target of a hostile takeover
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