Use the information below for the following 3 questions. Each column reports sta

Question

Use the information below for the following 3 questions. Each column reports statistics for an investment. For example, the variance of Stock A is 0.0200, the expected return of the market is 0.16, and the covariance of Stock C with the Market is 0.0013 STOCK STOCK STOCK TBILLS MARKET Expected Return Variance 0.19 0.15 0.09 0200 01960205 Covariance with the Market .0070 0045 0013 0.07 0000 0064 0.16 19. What comes closest to the expected return on an equally weighted portfolio that consists of Stock A, Stock B, and Stock C A. 10.9% B. 12.5% C. 14.3% D. 15.0% E. 19.0% 20. What comes closest to the variance of a portfolio half invested in Stock A and half invested in the market? A. 0.00 B. 0.01 C. 0.02 D. 0.03 E. 0.04 21. What comes closest to the beta of Stock C? A. 0.10 B. 0.15 C. 0.20 D. 0.25 E. 0.30 22. PC and Mac are two identical firms operating in identical markets. PC is unlevered with assets valued at $1,000 and has 40 shares of stock outstanding. Mac also has 1,000 in assets and has $500 in debt financed at an interest rate of 10% and has 20 shares of stock outstanding. Which of the following comes closest to the level of EBIT that would make earnings per share the same for PC and Mac? Assume perfect capital markets A. $100 B. $200 C. $300 D. $400 E. $500

Explanation / Answer

1) expected return - Stock Weight(w) Return( r) w x r A 0.333333 19 6.333333 B 0.333333 15 5 C 0.333333 9 3 0 14.33333 Answer C 2) Variance of portfolio = wa^2 SDa^2 + wb^2 SDb^2 + 2 wa wb cov(a,b) Wa= 0.5 Wb = 0.5 Sda^2 = 0.02 Sdb^2 = 0.0064 Cov(a,b) = 0.007 Variance of portfolio = (0.5)^2 (0.02) + (0.5)^2(0.0064) + (0.5)(0.5)(0.007) 0.25(0.02+0.0064+0.007) =0.00835 Approx 0.01 (B) 3) Beta of stock = COV with market/Variance of market 0.0013/0.0064 0.203125 (c ) 4) PC MAC EBIT x x Less: Interest(500 x 10%) 0 50 NI x x - 50 Divide by No. of shares 40 20 x/40 = (x-50)/20 20 x = 40 x - 2000 x = 2000/20 x = 100 (a) Please provide feedback…. Thanks in advance…. :-)

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.