lational Investment Corporation has invested its portfolio as shown below. What is National's expected portfolio return? Asset Portfolio weight Expected return Money market securities 25% 8% Corporate bonds 30% 12% Equities 45% 9%
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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- Calculate WACC from following data. Risk free rate 1.63% total debt $78.93 billion Market Cap $2580 billion Beta 0.86 Corporate Bond rate 3.10% CAPM S&P historical return 5.90% Tax Rate 21% please show stepsCalculate the cost of equity with the CAPM Calculate the cost od debt based on what the company is currently paying for its debt - Beta of the industry = 1.16 - Equity Risk Premium = 6.97% - Risk-free rate = 3.77% - Objective capital structure of the industry = 13.24%The following data refers to Company Z: - Beta = 1.7 - Required return on debt (yield to maturity on a long term bond) = 3.1% - Tax rate = 21% - 30-year government bond = 2.3% - Market risk premium can be assumed to be 5% Estimate the cost of capital (WACC) for Company Z.
- George Stephenson's current portfolio of $2 million is invested as follows Summary of Stephenson's Current Portfolio Percent of Expected Annual Annual Standard Value Total Return Deviation Short-term bonds $ 200,000 10% 4.6% 1.6% Domestic large-cap equities Domestic small-cap equities Total portfolio 600.000 30 12.4 19.5 1,200,000 60 16.0 29.9 $2,000,000 100% 13.8 23.1 Stephenson soon expects to receive an additional $2 million and plans to invest the entire amount in an index fund that best complements the current portfolio. Stephanie Coppa, CFA, is evaluating the four index funds shown in the following table for their ability to produce a portfolio that will meet two criteria relative to the current portfolio: (1) maintain or enhance expected return and (2) maintain or reduce volatility. Each fund is invested in an asset class that is not substantially represented in the current portfolio. Index Fund Characteristics Expected Annual Standard Deviation Correlation of Returns Index Fund…A project hasan equity beta of 1.10 (based on similar listed company after making all necessary adjustments); the market risk premium is expected to be 59% and the yield on government bonds has been and remains at 7.5%. Determine the company's cost of equity based on the Capital Asset Pricing Model (CAPM)The fund manager of Fritz Investment Holdings was asked to review the risk and return of the company's leveraged portfolio. The characteristics of the company's assets and liabilities are as follows: The portfolio return is closest to: Duration Interbank Borrowings Fixed Income Securities Tenor Amount Yield 40,000,000,000.00 3% 3 months 53,000,000,000.00 4.90% 20 years 0.25 12
- Consider the following table for different assets for 1926 through 2020. Standard Deviation 19.7% Series Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds Intermediate-term government bonds U.S. Treasury bills Inflation Average return 12.2% 16.2 6.5 6.1 5.3 3.3 2.9 Expected range of returns Expected range of returns a. What range of returns would you expect to see 68 percent of the time for large-company stocks? Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. What about 95 percent of the time? 31.3 8.5 9.8 Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. % to % to 5.6 3.1 4.0 % %The following information is related to X corporation: X's Beta was 1.3, market index 1 January 2020 was 100, market index 31 December 2020 was 110 and interest on treasury bills was 0.03 (risk free). Stock returns using the capital assets pricing model Question 20Answer a. 0.132 b. 0.143 c. 0.112 d. 0.121The returns of Railroad United (RIU) are listed below, along with the returns on Major Application of Technology (MAT). State of economy Prob. of state of economy ▸ RIU Economy 1 Economy 2 Economy 3 Economy 4 1. What is the expected return of a portfolio that is 50% in stock RIU and 50% in MAT? 15% 25% 30% 30% MAT -14% 16% 22% 7% -9% 11% 15% 5% 2. What is the standard deviation of the portfolio that is 50% in stock RIU and 50% in MAT?
- Consider the following average annual returns: Average Return 23.4% 13.4% 7% 6.4% 4.7% Investment Small Stocks S&P 500 Corporate Bonds Treasure Bonds Treasury Bills What is the excess return for the portfolio of small stocks? O A. 16.8% OB. 15.9% O C. 18.7% OD. 11.2%You have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)You have invested in the following portfolio: an amount of cash USD 111 earning 0.04 percent return. An amount of treasury bills USD 171, earning 0.07 percent return, an amount of bonds USD 150 earning 0.07 percent return. And an amount of stock USD 219 earning -0.11 percent return. Calculate the investment portfolio return..