prices of the goods are equal. Arbitrage Pricing Theory describes a mechanism used by investors to identify an asset, such as a share of common stock, which is incorrectly priced. On the other hand the Capital Asset Pricing Model is based on a comparison or the systematic risk/market risk of individual investment with the risk of all shares in the market. It is also used to calculate cost of equity and incorporates risk. ARBITRAGE PRICING THEORY Arbitrage Pricing Theory was developed by the economist
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cash payments received due to ownership, plus the change in market price usually expressed as a percent of the beginning market price of the investment. Return comes to you mainly from two sources – income or dividend plus any price appreciation (capital gain or loss) Dt + ( Pt – Pt-1) R = Pt-1 Suppose, you buy for Tk. 100 a security that would pay Tk. 7 in cash to you and be worth Tk. 106 one year later. This return would be (7 +6)/ 100 = 13%
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Suppose all distinct assets in the economy have a correlation of ρ = −.02 with every other asset. Let the variance of each asset be 0.25, and the investor holds an equally weighted portfolio of these assets. How many of such assets should an investor hold so that the variance of her portfolio is zero? (b) If the correlation was 0.02 can the investor ever achieve a zero variance? (c) For the case that the correlation is 0.4, and the investor holds an equally weighted portfolio of 10 assets, calculate the
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Efficient frontier is the plot of efficient portfolios by combining risky assets and risk free assets a. True b. False 5. The portfolio on efficient frontier which has least risk is a. Market Portfolio b. Efficient Portfolio c. Minimum Variance Portfolio d. None 6. Risk that cannot be diversified is a. Systematic Risk b. Non Diversifiable Risk c. Market Risk d. All the Above 7. Capital Market Line ( CML ) is the plot of __________ on X – Axis and ___________
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account b. Capital account c. Official account d. None of the above 4. Interest rate swaps can be explained as an agreement between _________ parties a. One b. Two c. Three d. None of the above 5. Capital account convertibility in India evolved in August a. 1996 b. 1995 c. 1994 d. None of the above MM.100 1 IIBM Institute of Business Management Examination Paper: Finance Management 6. Interest rate parity is an economic concept, expressed as a basic algebraic identity that relates a. Capital rate
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analysis also helps in making inter firm comparison and also comparisons between different divisions of the company. The required rate of return of CAT is calculated with the help of CAPM model. The model explains the relationship between the systematic risk associated with a stock and its expected return. In this model a stock’s expected return is the risk free rate of return (generally return on Govt. Treasury bonds is taken as risk free rate of return) plus a risk premium based on the stock’s systematic
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answer sheets. This is a closed book exam. Calculators are permitted. Good luck! Exercise 1 (3 points) TRUE/FALSE questions Are the following statements true or false? Justify all your answers in maximum 3 lines each. a) According to the Capital Asset Pricing Model (CAPM), in equilibrium, all securities lie on the security market line. (1 point) TRUE: The SML depicts risk/return relationships where the risk measure is beta. In equilibrium, all securities are fairly priced and lie on the SML (not
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Table of content Introduction.................................................................................................................................2 Justification...............................................................................................................4 Rationale....................................................................................................................5 Performance (Conclusion) ………………………………………………………6 Portfolio performance……………………………………………………………
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Dear Mr. Cohrs, We are pleased to offer our consulting opinion in regards to the cost of capital, debt, and equity. We have reviewed and analyzed the industry and market data provided as well as heavily researched your industry to understand trends, risks, growth potential, etc. The attached report is a detailed summary of problems and decisions faced based on the method of calculating the cost of capital, cost of equity, and the cost of debt. We have focused our efforts to specifically outline
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calculate the cost of capital, we need to use the Weighted Average Cost of Capital (WACC) formula, a shown below. WACC: (%debt)* (pretax cost of debt capital)*(1-marginal effective tax rate) + (%equity)*(cost of equity capital) In order to calculate Boeing’s debt percentage, it is assumed in this analysis that the capital structure remains the same and is unaffected by the current potential 7E7 project. The debt/equity ratio is .525, as listed in Exhibit 10 of the case. To calculate the total
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