DeVry Chicago BUSN 379 Finance Wk5 (2014)

Finance Wk5 Homework 1. Question : (TCO 8) Over the period of 1955-2006: Student Answer: long-term government bonds underperformed large corporate stocks. small-company stocks underperformed large-company stocks. inflation exceeded the rate of return on U.S. Treasury bills. U.S. Treasury bills outperformed long-term government bonds. Question 2. Question : (TCO 8) Based on the efficient market hypothesis, all “informed” investors will earn: Student Answer: excess profits over the long-term. excess profits but only on short-term investments. a return equal to the value they paid for an investment. a return that cannot be accurately predicted because investments are subject to the random movements of the markets.   Question 3. Question : (TCO 8) Which of the following statements is true regarding systematic risk? Select all that apply: Student Answer: is diversifiable is the total risk associated with surprise events it is not project or firm specific is measured by beta Question 4. Question : (TCO 8) Assume a project that has the following returns for years 1 to 5: 15%, 4%, -13%, 34%, and 17%. What is the approximate expected return of this investment? Student Answer: 11% 17% 16.60% 10% Question 5. Question : (TCO 8) Assume you are considering investing in two stocks, A & B. Stock A has an expected return of 16% and Stock B has an expected return of 9.5%. Your goal is to create a two-security portfolio that will have an expected return of 12%. If you have $250,000 to invest today, approximately how much would you invest in Stock A? Student Answer: $96,000 $150,000 $75,000 More than $200,000 Question 6. Question : (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows:The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. What is the standard deviation of Stock I and II respectively? Student Answer: 12 and 20% 12.5 and 23% 1.25 and 2.326% Cannot be determined with the information given Question 7. Question : (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows:The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. Which statement is true? Select all that apply: Student Answer: Stock I has more overall risk than Stock II Stock II has less systematic risk than Stock I Stock I has a higher risk premium than Stock II None of the above are correct statements Question 8. Question : (TCO 8) Which statements are true regarding risk? Select all that apply: Student Answer: The expected return is usually the same as the actual return A key to assessing risk is determining how much risk an investment adds to a portfolio Risks can always be decreased or mitigated by the financial manager The higher the risk, the higher the return investors require for the investment   Question 9. Question : (TCO 8) Which type of risk does beta measure? Look at Table 11.8 in your textbook. Does this table indicate that Citibank has a higher overall risk than Home Depot? Why or why not? Student Answer: Company Beta Coefficient Home Depot 0.46 Kellogg Co. 0.57 South west Airlines 0.85 American Eagle Outfitters 0.96 Google 1.28 Abercrombie & Fitch 1.33 General Electric 1.39 eBay 1.43 Citigroup 2.42 Beta is a measure used in comparing the volatility of an asset in comparison to the stock market as a whole (S&P 500). The S & P has a beta of 1.0. The growth stocks may have a high beta than the beta of market because the risk involved is high and dividend paying stocks generally have low beta. A beta of 1 indicates that the price of the security will move in the same direction as market. A beta of less than one denotes that the security is less volatile in comparison to market and beta of greater than one signifies that the security will be more volatile than the market. In the given case, the beta of Citigroup is highest which indicates that it is the most risky company among the group of companies given.