# Tutorial 5, Capm Investments

Submitted By boyroytoy7
Words 251
Pages 2
Tutorial 5, CAPM
Investments

Problem 1

Part B

(Exercise n. 4, 8.a, and 8.b in the book). • What must be the beta of a portfolio with E(rp ) = 20%, if rf = 5% and E(rm ) = 15% ? • Consider the following table, which gives a security analyst’s expected return on two shares for two particular market returns

Market Return 5% 20%

Aggressive share 2% 32%

Defensive share 3.5% 14%

– What are the betas of the two shares? – What is the expected rate of return on each share if the market return is equally likely to be 5% or 20% ?

......... Problem 2 Part A.1

(Exercise n. 8.c and 8.d in the book). Continuing from Part B... • If the T-note rate is 8% and the market return is equally likely to be 5% or 20%, draw the SML for this economy • Plot the two securities on the SML graph. What are the alphas of each?

.........

Problem 4

2

Problem 3

Part A.2

(Exercise n. 9, 10, 11, 12, 13, 14 and 15 in the book)

......... Problem 4 Part A.3

(Exercise n.19.a the book) Two investment advisers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of the ﬁrst adviser was 1.5 while that of the second was 1. • Can you tell which adviser was a better selector of individual shares (aside from the issue of general movements in the market)?

.........

Investments

Tutorial 5, CAPM…...

### Similar Documents

Free Essay

#### Fins2624 Course

...ACTIVITIES 1 1 1 1 1 1 2 2 3 3 4 4 4 5 6 6 5 6 7 1 2 2.1 2.2 2.3 2.4 2.5 3 4 COURSE RESOURCES COURSE EVALUATION AND DEVELOPMENT COURSE SCHEDULE ACADEMIC HONESTY AND PLAGIARISM STUDENT RESPONSIBILITIES AND CONDUCT Workload Attendance General Conduct and Behaviour Occupational Health and Safety KeepingInformed SPECIAL CONSIDERATION AND SUPPLEMENTARY EXAMINATIONS STUDENT RESOURCES AND SUPPORT 7 7 8 1 1 1 1 1 2 2 2 2 4 3.1 Approach to Learning and Teaching in the Course 3.2 Learning Activities and Teaching Strategies 4 ASSESSMENT 4.1 Formal Requirements 4.2 Assessment Details 4.3 Late Submission PART B: KEY POLICIES, STUDENT RESPONSIBILITIES AND SUPPORT PART A: COURSE-SPECIFIC INFORMATION 1 STAFF CONTACT DETAILS Lecturer-in-charge: Joakim Bang Room 311 Phone No: 9385 55484 Mobile: 04 0870 7830 (please keep it roughly within office hours) Email: j.bang@unsw.edu.au Consultation Times: Mondays 15:00 to 17:00, ASB 311. That's in my office in the west wing of the ASB building. Please use the intercom to get in. Other lecturers: Sidharth Sahgal Room 304C Email: s.sahgal@unsw.edu.au A full list of tutors will be posted on Course Website. 2 COURSE DETAILS 2.1 Teaching Times and Locations Lectures start in Week 1(to Week 12): The Time and Location are: Stream 1 Stream 2 Stream 3 Mon Mon Tue 12:00 18:00 11:00 14:00 20:00 13:00 Science Theatre Physics Theatre Science Theatre Tutorials start in Week 2 (to Week 13). A full list of tutorials, times and tutors will be on the......

Words: 4844 - Pages: 20

#### Fin10708 Finance and Investment for Business Topic 7 Tutorial Questions

...FIN10708 Finance and Investment for Business Topic 7 Tutorial Questions 1. Problem 8, p. 383 of the textbook = on excel document 2. Problem 9, p. 383 of the textbook. 0.72 x 0.1062+0.32 +0.15652+2.07 x 0.3 x 0.48 x 0.06 x 00.185 then square root 3. Using information in Questions 1 and 2 above: (a) Calculate the portfolio’s returns in each of the years 2007 through to 2012 (b) Calculate the portfolio’s average annual return (c) Calculate the portfolio’s standard deviation using your results from (a) and (b) and check that this standard deviation equals the one you calculate in Question 2 above. 4. Problem 16, p. 384 of the textbook. 5. A market analyst predicts that the expected return on the All Ordinaries Share Price Index will fall by 10% this year. Telstra has a beta of 0.51 and BHP Billiton has a beta of 1.17. (a) What would you expect to happen this year to the return on an investment in (i) Telstra and (ii) BHP Billiton? (b) If you accept the analyst’s prediction, should your investment portfolio contain shares with mainly high value or low value betas? 6. Problem 21, p. 385 of the textbook. 7. Problem 22, p. 385 of the textbook. 8. Problem 28, p. 385 of the textbook. 9. Company A has a beta of 0.7 and Company B has a beta of 1.4. If the risk-free rate is 4% and the market risk premium is 7%, according to the CAPM what is the expected return on an equally weighted portfolio of A and B? Show how this can be calculated in two different......

Words: 325 - Pages: 2

#### Sample

...Name: Tutorial Section (Day and Time): Student ID: BFW3121 Investments and Portfolio Management Tutorial Questions for Week 7 CHAPTER 7 Problems 4,9,10,11 and 12 4. E(r) = rf + β [E(rM) – rf ] , rf = 5%, E(rM) – rf = 9.5% \$1 Discount Store: E(r) = 5% + 1.4 9.5% = 18.3% Everything \$5: E(r) = 5% + 1.0 9.5% = 14.5% 9. E(rp) = rf + β [E(rM) – rf ] Given rf = 5% and E(rM)= 12%, we can calculate  12.7% = 5% + (12% – 5%)  = 1.1 10. If the beta of the security doubles, then so will its risk premium. The current risk premium for the stock is: (10% – 4%) = 6%, so the new risk premium would be 12%, and the new discount rate for the security would be: 12% + 4% = 16% If the stock pays a constant dividend in perpetuity, then we know from the original data that the dividend (D) must satisfy the equation for a perpetuity: Price = Dividend/Discount rate 30 = D/0.1 D = 30  0.1 = \$3 At the new discount rate of 16%, the stock would be worth: \$3/0.16 = \$18.75 The increase in stock risk has lowered the value of the stock by 37.50%. 11. The cash flows for the project comprise a 10-year annuity of \$10 million per year plus an additional payment in the tenth year of \$10 million (so that the total payment in the tenth year is \$20 million). The appropriate discount rate for the project is: rf + β [E(rM) – rf ] = 4% + 1.5......

Words: 637 - Pages: 3

#### Corporate Finance

...TUTORIAL 1 BUSINESS PLANNING & FINANCIAL PLANNING 1. Candidate should explain that a stockholder owns part of a company and is entitled to income in the form of dividends. Stockholders also elect directors who run the company. Stakeholders are groups of people who have an interest in how the firm is run. These include stockholders, employees, management, creditors and customers among others. Each group is interested in the firm’s operation and profitability for its own reasons. All stockholders are stakeholders, but not all stakeholders are stockholders. 2. The two common sources of corporate financing are stocks (shares) and bonds. Shareholders are the owner of the firm in which they are entitled to dividend if firms generate profit. Bondholders are creditors to a firm. They receive fixed coupon payment (annually or semi-annually) until maturity of the bond plus principle at maturity. 3. Symmetric Information is a situation in which investors and managers have identical information about firms’ prospects. Asymmetric information is a situation in which managers have different (better) information about firms’ prospects than do investors. 4. The relationship between stockholders and the management is called the agency relationship. This occurs when the shareholders as principals hire their agents to act on their behalf. The possibility of conflicts of interest between them is termed as the agency problem. There are two types of agency costs, the direct costs originating from......

Words: 8052 - Pages: 33

#### Npv Cap Bud

...Introduction Buying Time (HBS online tutorial) Kaplan 104708 2005 -- -- Alternative: Introduction to Accumulated Value, Present Value, and Internal Rate of Return Hammond 173003 1972 10p -- Valuing Capital Investment Projects Kester 298092 1997 5p 204152 Alternative: Tree Value Ruback 201031 2000 3p 202018 Luehrman 207121 2007 6p 209156 Luehrman & Abelli 4212 2010 8p 4213 Piper & DeVolder 4021 2009 32p 4024 Stafford 202027 2001 6p 202029 2. Exercises 3. Net Present Value Stryker Corp.: In-sourcing PCBs Alternative: New Heritage Doll Company (HBP Brief case) 4. Cash Flow Forecasting Expansion and Risk at Hansson Private Label, Inc.: Evaluating Investment in the Goliath Facility (HBP Brief case) Alternative: Ocean Carriers 5. Capital Budgeting and Policy Stryker Corporation: Capital Budgeting Alternative: Target Corporation (Darden case) Luehrman 208046 2007 11p -- Eades, Ding, & Yeaton UV1057 2008 20p UV1058 II. Rationale for selection and sequencing the items in this module Both of the suggestions in Section 1 provide an intuitive overview of the basic concepts and terminology of project valuation. Each selection covers the time value of money, discounted cash flows, net present value, and internal rates of return. The Buying Time tutorial is an interactive multimedia......

Words: 912 - Pages: 4

Free Essay

#### Corporate Spys

...com/university/behavioral_finance/default.asp Thank-you very much for downloading the printable version of this tutorial. As always, we welcome any feedback or suggestions. http://www.investopedia.com/contact.aspx Table of Contents 1) Behavioral Finance: Introduction 2) Behavioral Finance: Background 3) Behavioral Finance: Anomalies 4) Behavioral Finance: Key Concepts - Anchoring 5) Behavioral Finance: Key Concepts - Mental Accounting 6) Behavioral Finance: Key Concepts - Confirmation and Hindsight Bias 7) Behavioral Finance: Key Concepts - Gambler's Fallacy 8) Behavioral Finance: Key Concepts - Herd Behavior 9) Behavioral Finance: Key Concepts - Overconfidence 10) Behavioral Finance: Key Concepts - Overreactions and Availability Bias 11) Behavioral Finance: Key Concepts - Prospect Theory 12) Behavioral Finance: Conclusion Introduction According to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways. Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions. By the end of this tutorial, we hope that you'll have a better understanding of some of the anomalies (i.e., irregularities) that......

Words: 8866 - Pages: 36

#### Capital Budgeting

...capital structure. The pedagogical approach used is a mixture of lectures and case examples. Cases are often used as a vehicle for discussing the complexities of real-world financial problems. To benefit most from this method of teaching, you will want to come prepared to discuss the cases in detail. By the end of the semester, students should be able to: (1) describe essential characteristics of the finance profession and institutions, (2) be conversant in basic financial jargon, (3) value paper assets (stocks and bonds) and tangible assets (capital budgeting) using the tools of time value of money, including NPV and IRR, (4) explain the various sources of financing, their associated costs, and their advantages and disadvantages, (5) calculate and use financial statements and ratios to analyze a business and create and use pro forma statements for planning and decision-making purposes, (6) appreciate the complexities international business, and (7) demonstrate team skills by actively participating in group written cases. Course Materials Text: Background readings and problem sets are from Ross, Westerfield and Jordan (RWJ), Fundamentals of Corporate Finance, 8th Edition, Richard D. Irwin, Inc., 2008. You will sometimes find that the readings are not necessarily highly correlated with the cases. This is because the cases tend to bring together many aspects of finance at once. Be patient, the concepts will gradually all fall into place as you move through the......

Words: 2362 - Pages: 10

#### Finance

...[pic][pic] FIN 222 Corporate Finance Individual Major Assignment [80 marks] This manual outlines the followings. Objective of the assignment Details of questions (Instructions will be provided wherever necessary.) Format requirements Printing requirements Submission requirements ➢ Objective of the Assignment In Lecture 5 (CH11 and CH12), you were introduced to the concept of systematic risk, as measured by beta. Beta is an indicator of an asset’s exposure (or vulnerability) to systematic risk and evaluates the degree to which an asset’s return is correlated with the market return. Beta is a key parameter in the Capital Asset Pricing Model (CAPM) which is most commonly used asset pricing model for the estimation of required rate of returns on a share (i.e. cost of equity=rE). This assignment consists of two parts. Part I directs you to work with real financial data in Excel and aims to take you through the basic exercise of estimating a company beta and computing statistics which can be evaluated as part of investment decision-making process. Part II requires you to write a report based on interpretations of the outputs obtained from the first part. In this manual, you will also find out how to download historical share price, market index data and interest rates from the web portal. ➢ Details of Questions PART 1 [30 marks] To successfully complete PART 1, please read each section carefully. You must read “Format and printing requirement” before......

Words: 3262 - Pages: 14

#### Study Guide

...Advanced Financial Management FIN4801 YEAR COURSE Department of Finance, Risk Management and Banking Tutorial letter 101/0/2012 This tutorial letter contains important information about your module. Bar code CONTENTS 1 1.1 2 2.1 2.2 3 3.1 3.2 4 4.1 4.2 4.3 5 6 7 8 8.1 8.2 8.3 INTRODUCTION AND WELCOME ....................................................................................................... 3 Tutorial matter ................................................................................................................................... 3 PURPOSE OF AND OUTCOMES FOR THE MODULE ........................................................................ 4 Purpose ............................................................................................................................................. 4 Outcomes .......................................................................................................................................... 4 LECTURER AND CONTACT DETAILS ................................................................................................ 5 Lecturer ............................................................................................................................................. 5 Department ........................................................................................................................................ 5 MODULE RELATED RESOURCES......

Words: 8325 - Pages: 34

Free Essay

#### If Assignement

...of information (4 marks) Presentation skills (fluency of presentation, slides preparation and flow of presentation, writing skills in 10 pages report) (5 marks) Response to Q&A (5 marks) [Total: 50 marks] Other Requirements Students are required to group themselves into a group consists of a minimum of 4 or a maximum of 5 members and register their grouping with their lead lecturer/respective tutor the latest by Week 3. Each assignment group is required to select one multinational enterprise from the list provided. Assignment groups from the same tutorial group are not allowed to choose the same multinational enterprise. Students should register their groupings and selected multinational enterprise for analysis with their respective tutor by Week 3 or ten (10) marks will be deducted for any delay in registration. No changes are allowed after the submission. Lead lecturer’s approval must be obtained if there is any change in the number of students due to withdrawal from the unit. Presentation for this group assignment will be held in Week 10 and Week 11 (time and venue to be decided by the respective tutor). Each group will be given 25 minutes for the presentation and there will be 5 minutes of Q&A session. Standard format should apply to the preparation of PowerPoint slides such as Arial, minimum font size of 16 Bold (maximum font size of 20), suitable colour background and......

Words: 1505 - Pages: 7

#### Case

...IMPORTANT SCHEDULE ANNOUNCEMENT: Thursday, February 19 is a DAY LONG exercise that requires your participation until 5:30pm that evening. By compressing the exercise into a single day we were able to designate Friday as a Reading Day. Please DO NOT schedule any travel until after your obligation for the exercise ends at 5:30pm Thursday evening. COURSE DESCRIPTION First-Year Financial Management and Policies (FMP) reflects three important features of the Darden MBA Program: (1) it is a general management program; (2) the program, through its frequent use of the case method of instruction, has a practical, pragmatic bias and a decision- orientation; and (3) the first-year program provides the basic training on which students can build in the second-year. Consistent with the first-year program, FMP aims to provide: 1. An Introduction. The course provides the basic framework necessary to pursue further study in finance in the second-year of the MBA program and on his or her own thereafter. This framework is an orientation towards valuation. 2. Basic Mastery. The course emphasizes essentials, the tools and concepts that every general manager, entrepreneur, or manager in other functional fields should know. 3. A Corporate Perspective. Because we seek to understand the problems of general managers, this is a corporate finance course, rather than a course in investments, banking, or personal finance. While elements of these related subjects must be brought to bear, our ultimate......

Words: 4860 - Pages: 20

#### Mib Syllabus

...INSTRUCTOR AVAILABILITY Please contact by email CLASS TIMES & ROOM(S) MIB1: Jan 7, 9, 11, 15, 17, 21, 23, 25, 1:30-4:50, Feb. 1, 9:00-12:20, Feb. 7, 1:30-4:50 COURSE AIMS AND DESCRIPTION OF CONTENT This is an introductory course of finance for MIB students. The course aims to provide students with a conceptual framework and a set of technical tools for making corporate investment decisions. The focus will be maximizing the value of the firm and capital budgeting. Some ethical issues will be highlighted throughout the course. INTENDED LEARNING OUTCOMES Key (Assessed) Learning Outcomes: On completion of this course, students should understand and be able to do the following: 1. Estimate the cost of capital for corporate investment decisions; 2. Make corporate investment decisions using discounted cash flow method; 3. Manage working capital and corporate long-term growth. Supplemental Learning Outcomes: While not assessed, it is anticipated that students will develop the following: 4. Understand the importance of corporate governance for achieving long-term corporate financial objectives and valuation; 5. Understand some unique features of Chinese capital markets. TEACHING AND LEARNING The course will be a mixture of lectures, case discussions and individual and group practices. Students are expected to do the following. 1. 2. 3. 4. Read the assigned textbook chapters BEFORE the classes. Prepare for cases BEFORE case discussions, and submit case work as required.......

Words: 3258 - Pages: 14

Free Essay

#### Abcd

...Prof. Nasheman Bandookwala 3 10 Dr. Vipul Patel 3 13 Dr. Neera Singh & Prof. Mansi Vahia 3 18 Prof. Sandeep Makawana 3 21 Dr. Abhay Raja & Prof. Raviraj Gohil 3 23 Prof. Tirthank Shah 2 26 Dr. Rinki Rola 3 29 Prof. Vivek Banerjee 2 34 5 6 7 8 9 10 11 * * Business Research Methods Human Resources Management Marketing Management -2 Financial Management Basics of Business Planning Quantitative Methods-2 Legal Aspects of Business Page 4 7 Semester II Duration 37 List of Holidays during Semester II 38 3 Shanti Business School PGDM 2015-17 Semester II Course: Written Analysis and Communication Faculty: Prof. Dhriti Bhattacharjee (dhriti@scs.edu.in) Credits: @ Total no. of sessions: 19 Course Objective: Upon completion of this course the student will be able to: 1. Demonstrate an understanding of the communication process. 2. Develop skill in applying planning and writing techniques to the solution of business problems. 4. Analyze business communication situations and produce letters in language and style appropriate to specific situations. 5. Produce an analytical report based on original research with comprehensive documentation. Learning Outcome: Upon completion of this course the student will be able to: 1. Write, proofread and revise common business communications. 2. Identify proper types of messages, the purpose for writing,......

Words: 7010 - Pages: 29

#### Recruitment and Selection at Cmpdi

...the internal employees and fellow trainee of CMPDI for providing consistent encouragement. The learning from this experience has been immense and would be cherished throughout the life. HEEMA KUMARI TABLE OF CONTENT Serial No. | Topic | Page no | 1. | Coal India: a view inside | | 2 | Central Mine Planning And Design Institute: a view inside | | 3 | Capital Budgeting | | 4 | Performance at a glance of CMPDI | | 5. | Financial overview of CMPDI | | 6. | Conclusion | | 7. | Suggestions and recommendations | | 8. | Bibliography | | CHAPTER-1 COAL INDIA LIMITED INTRODUCTION TO COAL INDIA LIMITED Coal India Limited (CIL) as an organized state owned coal mining corporate came into being in November 1975 with the government taking over private coal mine .With the government undertaking over private coal mines. Head office of Coal India is located at Kolkata . With the modest production of 79 million tons at the year of its inspection CIL today is the single largest producer in the world . operating through 81 mining areas CIL is an apex body with 7 wholly owned coal producing subsidiaries......

Words: 7375 - Pages: 30