Select only one option 1 or 2…
Option #1: Questions
Question 1: Portfolio Risk
Golden Eagle invests 60% of their funds in stock I and the balance in stock J. The standard deviation of returns on I is 10%, and on J it is 20%. Calculate the variance of portfolio returns, assuming
The correlation between the returns is 1.0
The correlation is .5.
The correlation is 0.
- Question 2: Certainty Equivalents
- A project has the following forecasted cash flows:
- Cash Flows ($ Thousands)
C 0
C 1
C 2
C 3
-100
+40
+60
+50
The estimated project beta is 1.5. The market return r m is 16%, and the risk-free rate rf is 7%.
Estimate the opportunity cost of capital and the project’s PV (using the same rate to discount each cash flow).
What are the certainty-equivalent cash flows in each year?
What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year?
Explain why this ratio declines.
Question 3: Measuring Risk
The following table shows estimates of the risk of two well-known Canadian stocks:
Standard Deviation (%)
R 2
Beta
Standard Error of Beta
TDM
13
0.49
0.83
0.11
LLW
21
0.01
0.21
0.25
What proportion of each stock’s risk was market risk, and what proportion was specific risk?
What is the variance of TDM Bank? What is the specific variance?
What is the confidence interval on LLW’s beta?
If the CAPM is correct, what is the expected return on TDM Bank? Assume a risk-free interest rate of 5% and an expected market return of 12%.
Suppose that next year the market provides a zero return. Knowing this, what return would you expect from TDM Bank?
Question 4: Company Cost of Capital
You are given the following information for GFF Financial:
Long-term debt outstanding: $300,000
Current yield to maturity (rdebt ): 8%
Number of shares of common stock: 10,000
Price per share: $50
Book value per share: $25
- Expected rate of return on stock (requity): 15%
- Calculate GFF Financial’s company cost of capital. Ignore taxes.
- Your paper should be one to two pages in length (excluding cover page and references). Be sure to discuss and reference concepts taken from the assigned textbook reading and relevant research. Review the grading rubric to see how you will be graded for this assignment.
- Option #2: Cryptocurrency and Portfolio Risk
Up until recently, companies have not considered the use of cryptocurrency in regards to their portfolio diversification. Outline how the cryptocurrency market has adapted to meet the needs of companies in their attempts to mitigate portfolio risk. In your outline, address the emergence of cryptocurrency derivatives and how this relates directly to corporate finance decisions. Be sure to discuss the specific cryptocurrencies companies may use and how they may affect portfolio risk.