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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
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%?
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0.2% |
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0 |
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-0.2% |
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-2% |
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Not enough information |
The expected return and betas for three stocks are given below:
| Stock | EXPECTED RETURN (%) | BETA |
| A | 9.5 | 1.4 |
| B | 9 | 1.2 |
| C | 12 | 1.7 |
Expected market returns, E(rm), is 8% and risk-free rate is 3%. Which of the three stocks is undervalued according to the CAPM?
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A |
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B |
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C |
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None |
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There is not enough information to answer this question. |
According to the CAPM:
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An investor who is risk adverse should hold at least some of the risk-free asset in his portfolio. |
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All investors who take on risk will hold the identical portfolios of risky assets. |
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A stock with high risk, measured as standard deviation of returns, will have high expected returns in equilibrium. |
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Individual investors are price setters. |
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None of the above. |
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.
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I only |
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II only |
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I and II only |
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I and III only |
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I, II, and III |
Expert Solution
1)please see the attached file.
2)
In this case, we have the below mentioned inputs
Bill Value = $10 million
Bank charges = .60%
Hence Total Bill charges = $10000000*.60%
= $60000
Therefore, the issuer will receive = Bill value less Bank charges
= $10000000-$60000
= $9940000
Now, lets calculate the receipt of Bank on maturity of Bill discounted.
Scenario 1 which is interest rate of 4.8% p.a.
We have to calculate interest on $1 million for 90 days and formula will be $10000000*4.8%*90/360 ( assuming 1 year = 360 days)
Total interest = $480000*90/360
= $120000
Answer = The value of first parcel @4.8% = Bill Value+Interest= $10000000+$120000 = $10120000
Scenario 2 which is interest rate of 4.65%
We have to calculate interest on $1 million for 90 days and formula will be $10000000*4.65%*90/360 ( assuming 1 year = 360 days)
Total interest = $465000*90/360
= $116250
Answer = The value of first parcel @4.65% = Bill Value+Interest= $10000000+$116250 = $10116250
Scenario 3 which is interest rate of 4.65%
We have to calculate interest on $1 million for 90 days and formula will be $10000000*5.00%*90/360 ( assuming 1 year = 360 days)
Total interest = $500000*90/360
= $125000
Answer = The value of first parcel @5.00% = Bill Value+Interest= $10000000+$125000 = $10125000
Hence from the above calculation, we found that from Issuer's perspective the value will be $9940000
And from Bank;s perspective the value of first, second and third parcel will be $120000, $116250 and $125000 respectively
3)Please use this google drive link to download the answer file.
https://drive.google.com/file/d/1XHTmmBMqjnIx1jQW4IT-PeefjbwMsgRs/view?usp=sharing
Note: If you have any trouble in viewing/downloading the answer from the given link, please use this below guide to understand the whole process.
https://helpinhomework.org/blog/how-to-obtain-answer-through-google-drive-link
4)
Stock Alpha = a = 2%, Stock Beta = B = 1.1 and Market Return = Rm = 12 % and let the idiosyncratic return be e
Actual Return = R = 15 %
Therefore, as per the single-index mode:
R = a + B x Rm + e
15 = 2 + 1.1 x 12 + e
e = 15 - 2 - 13.2 = - 0.2 %
Hence, the correct option is (c)
NOTE: Please raise separate queries for solutions to the remaining unrelated questions as one query is restricted to the solution of only one complete question with up to four sub-parts.
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