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Expected return and standard deviation, NPV, IRR

18) Use the data below and consider portfolio weights of .60 in stocks and .40 in bonds.

Rate of Return
Scenario Probability Stocks Bonds
Recession 0.2 -5% 14%
Normal 0.6 15% 8%
Boom 0.2 25% 4%

a. What is the rate of return on the portfolio in each scenario?
b. What is the expected return and standard deviation of the portfolio?
c. Would you prefer to invest in the portfolio of stocks only or in bonds only?

21) Revenues generated by a new fad product in each of the next 5 years are forecasted as follows:
Year Revenues
1 $40,000
2 30,000
3 20,000
4 10,000
Thereafter 0

Expenses are expected to be 40 percent of revenues, and working capital required in each year is expected to be 20 percent of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment.
a. What is the initial investment in the product? Remember working capital.
b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 40 percent, what are the project cash flows in each year?
c. If the opportunity cost of capital is 10 percent, what is the project NPV?
d. What is the project IRR?

(See attached file for full problem description)


Solution Summary

Calculates 1) expected return and standard deviation of a portfolio 2) NPV and IRR of a project.