FINE 342 Lecture Notes - Lecture 10: Market Portfolio, Tax Rate, Risk Premium

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21 Jun 2017

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The holding period return is the return that an investor would get when holding an investment over a ercentage return(cid:2869)=(cid:1830)(cid:1835)(cid:1848)(cid:2869)(cid:1842)(cid:2868) +(cid:1842)(cid:2869) (cid:1842)(cid:2868)(cid:1842)(cid:2868) =(cid:1830)(cid:1835)(cid:1848)(cid:2869)+(cid:1842)(cid:2869) (cid:1842)(cid:2868) (cid:1842)(cid:2868) period of (cid:1866) years. When the return during year is given as (cid:1870)(cid:3036), holding period return is: (cid:1834)(cid:1842)(cid:1844)=(cid:4666)(cid:883)+(cid:1870)(cid:2869)(cid:4667) (cid:4666)(cid:883)+(cid:1870)(cid:2870)(cid:4667) (cid:4666)(cid:883)+(cid:1870)(cid:3041)(cid:4667) (cid:883) Suppose an investment provides the following returns over a 4-year period: Summary measures for the history of capital market returns: Standard deviation of returns: = (cid:4666)(cid:1870)(cid:2869) (cid:1870) (cid:4667)(cid:2870)+(cid:4666)(cid:1870)(cid:2870) (cid:1870) (cid:4667)(cid:2870)+ +(cid:4666)(cid:1870)(cid:3021) (cid:1870) (cid:4667)(cid:2870) (cid:1870) =(cid:4666)(cid:1870)(cid:2869)+(cid:1870)(cid:2870)+ +(cid:1870)(cid:3021)(cid:4667) (cid:1846) (cid:1846) (cid:883) (cid:1846) (cid:883) Investors are risk averse; they only want to hold securities (e. g. , stocks) if they receive an additional return above the risk-free rate. Covariance number (not the sign) is difficult to interpret, so . Calculate correlation coefficient: (cid:883) (cid:3002)(cid:3003) (cid:883, (cid:3002)(cid:3003)=(cid:883) perfect positive correlation, (cid:3002)(cid:3003)= (cid:883) perfect negative correlation (cid:1829)(cid:1867)(cid:1874)(cid:4666)(cid:1870)(cid:3002),(cid:1870)(cid:3003)(cid:4667)=(cid:3002)(cid:3003)=(cid:1831)[(cid:4666)(cid:1870)(cid:3002) (cid:1870) (cid:3002)(cid:4667) (cid:4666)(cid:1870)(cid:3003) (cid:1870) (cid:3003)(cid:4667)] The variance of the rate of return on a portfolio is:

Related Questions

[1] The explicit costs, such as the legal expenses, associated with corporate default are classified as _____ costs.
[A] beta conversion
[B] direct bankruptcy
[C] indirect bankruptcy

[2] An indirect cost of bankruptcy is the loss of key employees.
[A] True
[B] False

[3] A legal attempt to financially restructure a failing firm so that it can continue operating as a going concern is called a reorganization.
[A] True
[B] False

[4] The optimal capital structure has been achieved when the:
[A] weight of equity is equal to the weight of debt.
[B] debt-to-equity ratio selected results in the lowest possible weighted average cost of capital.
[C] cost of equity is maximized.

[5] The optimal capital structure will tend to include more debt for firms with:
[A] less taxable income.
[B] lower probability of financial distress.
[C] substantial tax shields from other sources.

[6] The optimal capital structure of a firm:
[A] will remain constant over time unless the firm makes an acquisition.
[B] will be the same for all firms in the same industry.
[C] will vary over time as taxes and market conditions change.

[7] In a world with corporate taxes, MM theory implies that that all firms should choose an all-debt capital structure.
[A] True
[B] False

[8] A firm is technically insolvent when:
[A] the value of its stock declines by more than 50 percent in any given 12-month period.
[B] the value of the firm's assets is less than the value of the firm's liabilities.
[C] it is unable to meet its financial obligations.

[9] Which one of the following statements is correct concerning a Chapter 7 bankruptcy?
[A] A firm reorganizes its operations in an effort to return to being a viable concern.
[B] A trustee will assume control of the firm's assets until those assets can be liquidated.

[10] If the net present value of a project is positive (non-zero), then the project's internal rate of return will exceed its required rate of return.
[A] True
[B] False

[11] Which one of these methods uses accounting values rather than financial values?
[A] AAR
[B] IRR
[C] NPV

[12] An investment should be accepted if the NPV is positive and rejected if it is negative.
[A] True
[B] False

[13] The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:
[A] net present value.
[B] payback period.
[C] internal rate of return.

[14] An investment is acceptable if its average accounting return (AAR):
[A] exceeds the target AAR.
[B] is less than the target AAR.

[15] The discount rate that makes the net present value of an investment exactly equal to zero is called the internal rate of return.
[A] True
[B] False

[16] The most valuable investment given up if an alternative investment is chosen is referred to as a(n):
[A] sunk cost.
[B] opportunity cost.
[C] erosion cost.

[17] The cost of test marketing a product prior to deciding whether or not to produce the product is a sunk cost.
[A] True
[B] False

[18] An asset will be depreciated faster using MACRS rather than the straight-line method.
[A] True
[B] False

[19] The financial break-even point determines which one of these values?
[A] Fixed costs
[B] Variable cost per unit
[C] Sales quantity

[20] The return earned in an average year over a multi-year period is called the _____ average return.
[A] arithmetic
[B] standard
[C] geometric

[21] The capital gains yield plus the dividend yield on a security is called the:
[A] geometric return.
[B] total return.
[C] variance of returns.

[22] Which one of the following is an example of a nondiversifiable risk?
[A] A poorly managed firm suddenly goes out of business due to lack of sales
[B] A key employee of a firm suddenly resigns and accepts employment with a key competitor
[C] A well respected chairman of the Federal Reserve suddenly resigns

[23] Beta values are highly dependent on the covariance of a security with the market.
[A] True
[B] False

[24] Insider trading does not offer any advantages if the financial markets are:
[A] inefficient.
[B] semiweak form efficient.
[C] strong form efficient.

[25] MM Propositions ignore bankruptcy costs.
[A] True
[B] False

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FINE 342 Lecture Notes - Lecture 10: Market Portfolio, Tax Rate, Risk Premium

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