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1)Your grandparents would like to establish a trust fund that will pay you and your heirs $175,000 per year forever with the first payment 13 years from today

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1)Your grandparents would like to establish a trust fund that will pay you and your heirs $175,000 per year forever with the first payment 13 years from today. If the trust fund earns an annual return of 3.4 percent, how much must your grandparents deposit today?

2)Commonwealth Bank agrees to establish a 270-day bill facility using 90-day bank bills. The face value of the facility is $10 million, and the issuer is charged an acceptance fee of 60 basis points. Calculate the net cash flows from 1) the issuer’s and 2) the bank’s perspective, respectively. Briefly explain what each of the cash flows stands for. (The first parcel is issued at a market yield of 4.80% p.a., the second at 4.65% and the third at 5.00%.)

3)You will receive 13 annual payments of $26,500. The first payment will be received 6 years from today and the interest rate is 5.5 percent. What is the value of the payments today?

4)Consider a single index model, the alpha of a stock is 2%, the beta is 1.1, and the market return is 12%. What is the idiosyncratic component of return given an actual return of 15%?

The expected return and betas for three stocks are given below:

Expected market returns, E(r_m), is 8% and risk-free rate is 3%. Which of the three stocks is undervalued according to the CAPM?

According to the CAPM:

Which of the following statements about the Capital Market Line is/are true?

   [I]            A rational investor will only invest in a portfolio along the CML.
[II] All portfolios along the CML have the same Sharpe Ratio.
             [III] An investor is indifferent towards portfolios along the CML.