budget so that the overall portfolio will have an Expected rate of return of 16%. (a) (b) What is the proportion y? What is the standard deviation of the rate of return on your client’s portfolio? Answer: a. E(rC) = rf + y[E(rP) – rf] = 8 + y(18 8) If the expected return for the portfolio is 16%, then: 16 = 8 + 10 y y 16 8 10 0.8 Therefore, in order to have a portfolio with expected rate of return equal to 16%, the client must invest 80% of total funds in the risky
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Explain systematic risk and what is firm-specific risk? Market equity beta measures the covariability of a firm’s returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market
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Financial management * Finance:- Finance may be defined as that administrative area which is concerned with arrangement of cash and credit effectively. * Business finance:- Business finance is the process of determining the required amount of fund, finding available sources of fund, calculating the nominal and effective cost of each sources of fund, conservating the collected funds properly and allocate the optimally in order to achieve the goal of an organization or a business firm.
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and risk of operations, financial managers can maximize the value of the company and therefore maximize shareholder wealth. 25 26 MULTINATIONAL COST OF CAPITAL AND CAPITAL STRUCTURE BACKGROUND ON COST OF CAPITAL Apart from working capital, a firm’s capital consists of equity (retained earnings and funds obtained by issuing shares) and debt (borrowed funds). With these funds a firm invests in a portfolio of projects, each project potentially offering different risks and different returns. The
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x (1.05/0.10) = $19.95 c) When a required rate of return goes up, the anticipated price goes down. In other words, the ‘better deal’ on the stock (lower price) gets you a higher overall return. Bond: a) The present value of that stream of payments is $785.45. b) When annual interest rate changes to 12.36%, i calculated the semiannual rate (which is 6%) and the present value is re-calculated as $917.59. Beta: a) Beta = (return – riskless rate) / market premium Therefore, Beta =
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FIN303 Exam-type questions For Final exam Chapter 9 1. Stock A has a required return of 10 percent. Its dividend is expected to grow at a constant rate of 7 percent per year. Stock B has a required return of 12 percent. Its dividend is expected to grow at a constant rate of 9 percent per year. Stock A has a price of $25 per share, while Stock B has a price of $40 per share. Which of the following statements is most correct? a. The two stocks have the same dividend yield.
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Name: Walter Chisholm Date: August 1, 2011 Course: FIN/370 Finance for Business Topic: Defining Financial Terms Instructor: Rodney Nelsestuen Financial Management: Principals and applications. Define the following terms and identify their roles in finance: Finance - Financial management is concerned with the maintenance and creation of economic value or wealth. Consequently, this course focuses on decision making with an eye toward creating wealth. As such, we will deal with
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Thoughts on Smart Beta Chao Liu May 22 2014 The two articles in FT introduce the recent popular investment strategy: smart beta. Smart beta concept is growing popularity across the world because it has allegedly been providing investors risk-adjust excess return. Some consider smart beta approach as a strategy lies between traditional active management in which the fund managers actively pick stocks for their portfolios, and the passive management in which the investor simply replicate the market
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American Finance Association Limited Arbitrage in Equity Markets Author(s): Mark Mitchell, Todd Pulvino, Erik Stafford Source: The Journal of Finance, Vol. 57, No. 2 (Apr., 2002), pp. 551-584 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/2697750 Accessed: 08/01/2010 15:26 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms
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the rate of return that a company needs to earn in order to satisfy the returns they have to pay out to debtholders and stockholders. The respective weight of each type of financing is determined by their percentage of total capital. The WACC is extremely relevant to a company’s capital budgeting team and other capital finance department members. WACC is extremely useful in determining whether or not to accept a capital project. If a proposed capital project produces a rate of return higher than
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