FINANCE IN BUSINESS WORLD

QUESTIONS : 

 

10.4,Explain why a characteristic of an efficient market is that investments in that market have zero NPVs. 

LO 1 7.

          Calculating Returns and Variability. Using the following returns, calculate the average returns, the variances, and the standard deviations for X and Y.

Year               x                    y

1                     21%              24%

2                     -16 -3

3 9 26

4 18 -13

5 4 30

 

(25)Using Return Distributions. Assuming that the returns from holding small-company stocks are normally distributed, what is the approximate probability that your money will double in value in a single year? What about triple in value?

 

(11.1)The expected returns are just the possible returns multiplied by the associated probabilities:

          E(RA) = .10 × −.20 + .60 × .10 + .30 × .70 = 25%

          E(RB) = .10 × .30 + .60 × .20 + .30 × .50 = 30%

 

(11.10)

Earnings and Stock Returns. As indicated by a number of examples in this chapter, earnings announcements by companies are closely followed by, and frequently result in, share price revisions. Two issues should come to mind. First: Earnings announcements concern past periods. If the market values stocks based on expectations of the future, why are numbers summarizing past performance relevant? Second: These announcements concern accounting earnings. Going back to Chapter 2, such earnings may have little to do with cash flow, so again, why are they relevant?

 1.

          Determining Portfolio Weights. What are the portfolio weights for a portfolio that has 110 shares of Stock A that sell for $79 per share and 85 shares of Stock B that sell for $62 per share?

        

        

          LO 1 2.

          Portfolio Expected Return. You own a portfolio that has $1,500 invested in Stock A and $2,600 invested in Stock B. If the expected returns on these stocks are 10 percent and 16 percent, respectively, what is the expected return on the portfolio?

                

       LO 1 3.

         Portfolio Expected Return. You own a portfolio that is 25 percent invested in Stock X, 40 percent in Stock Y, and 35 percent in Stock Z. The expected returns on these three stocks are 10 percent, 13 percent, and 15 percent, respectively. What is the expected return on the portfolio?

 

(6)Based on the following information, calculate the expected return.

state of economy                            probability  of state of economy                       rate of returns if state 

                                                                                                                                                        occurs

        recession  .25 -.09

         normal    .45 .11

          boom .30 .30

        

          (9) rate of returns if state occurs

State of economy                                       prob of state of economy        stock a      stock b     stock c

boom .65 .08 .02 .23

bust .35 .12 .18 -.03

        

      a  What is the expected return on an equally weighted portfolio of these three stocks?

       B What is the variance of a portfolio invested 20 percent each in A and B and 60 percent in C?