3. Present Value An individual is planning to invest in an insurance company pro
ID: 2762004 • Letter: 3
Question
3. Present Value
An individual is planning to invest in an insurance company product. The product will pay $15,000 at the end of this year. Thereafter, the payments will grow annually at a 3 percent rate forever. The individual will be able to invest his cash flows at a rate of 6.5 percent. What is the present value of this investment cash flow stream?
Present Value ___________
4. Stock Covariance
10 Points
Given the returns for two stocks with the following information, calculate the covariance of the returns for the two stocks.
Probability
Return Stock 1
Return Stock 2
E(R) 1
0.4
9%
11%
E(R) 2
0.5
11%
8%
Cov(R1,R2)
0.1
17%
13%
Covariance
4. Stock Covariance
10 Points
Given the returns for two stocks with the following information, calculate the covariance of the returns for the two stocks.
Probability
Return Stock 1
Return Stock 2
E(R) 1
0.4
9%
11%
E(R) 2
0.5
11%
8%
Cov(R1,R2)
0.1
17%
13%
Covariance
Explanation / Answer
Answer:3 PV of this investment cash flow stream:
PVP = CF ÷ (i - g)
=$15000/(0.065-0.03)
=428571.43
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