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Investment questions

Please see attached file.
1) You are the money manager of a $10 million investment fund that consists of 2 stocks with the following investment and betas. Assume that the CAPM holds, and kRF=6%, kM=14%.
Stock Investment Beta
A $ 4 million 1.2
B $ 6 million 1.4
A. What is the expected return of the fund?
B. What is beta of the investment fund?

2) Given the following market conditions, calculate the expected/required rate of return using the CAPM:
kRF=6%, kM=14%
A. What is bA of a security with kA=16.4%?
B. What is ki for a security with bi=1.4?

4) From the information below, calculate the accounting break-even point.
Fixed costs are $ 2500/year.
Variable costs: $ 8/unit.
Depreciation: $ 500/year.
Price: $ 25/unit.
Discount rate: 10%.
Project life: 4 years.
Tax rate: 34%.

5) The prices for IMB over the last 3 years are given below. Assuming no dividends were paid, what was the 3-year holding period return?

Year Price
0 $ 70
1 64
2 68
3 80

6) The total annual returns on common stocks averaged 12.2% from 1926 to 1994, small company stocks averaged 17.4%, long-term government bonds averaged 5.2%, while Treasury Bills averaged 3.7%. What was the average risk premium earned by long-term Government Bonds, and small company stocks respectively?

7) Tom bought 100 shares of stock at $20 each. At the end of the year, he received a total of $400 in dividends, and his stock was worth $2,500 total.
A. What was his dollar capital gain?
B. What was his total dollar return?
C. What was his total percentage return?
D. What was his total return?

8) A portfolio is entirely invested into Gavin's Mining Equity, which is expected to return 18%, and Bob's Inc. bonds, which are expected to return 6%. Three quarters of the funds are invested in Gavin's and the rest in Bob's. What is the expected return on the portfolio?


Solution Summary

The solution explains some questions relating to expected return, beta, break-even, holding period return, risk premium