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hammer [34]
3 years ago
5

The market price of a security is $74. Its expected rate of return is 20.2%. The risk-free rate is 3% and the market risk premiu

m is 6.5%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)
Business
1 answer:
tigry1 [53]3 years ago
5 0

Answer:

The market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged) will be $44.10.

Explanation:

Note: This question is not complete. The complete question is therefore presented before answering the question as follows:

The market price of a security is $74. Its expected rate of return is 20.2%. The risk-free rate is 3% and the market risk premium is 6.5%. What will be the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged)

Assume that the stock is expected to pay a constant dividend in perpetuity.

Explanation of the answer is now given as follows:

Since the correlation coefficient with the market portfolio doubles (and all other variables remain unchanged), it implies that beta and also the risk premium will also double.

From the question, we can obtain:

Current risk premium = Expected rate of return - Market risk premium = 20.2% - 6.5% = 13.70%

As the current risk premium will double, we have:

New risk premium = Current risk premium * 2 = 13.70% * 2 = 27.40%

Also, we have:

New discount rate = New risk premium + Market risk premium = 27.40% + 6.5% = 33.90%

Since it is assumed that the stock is expected to pay a constant dividend in perpetuity, the dividend can therefore e calculated as follows:

Dividend = Current market price * Current expected rate of return = $74 * 20.2% = $14.95

The new market price of the security can now be calculated as follows:

New market price of the security = Dividend / New discount rate = $14.95 / 33.90% = $44.10

Therefore, the market price of the security if its correlation coefficient with the market portfolio doubles (and all other variables remain unchanged) will be $44.10.

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Ruby, age 50, is considering going back to school. She would like to retire at age 67. She currently earns $50,000 per year. If
weeeeeb [17]

Answer:

Ruby should go to college.

Explanation:

Ruby is currently 50 years old and earning $50,000 per year.  

She would like to retire at 67.  

She is thinking of going back to college, to complete a graduate degree.

After completing a graduate degree from the college she would earn $55,000.

The total cost of a graduate degree is $75,000.  

Ruby still has 17 years to work and earn.  

Her income will increase by $5,000 after college

The increase in income earned after college until retirement

= $5,000 \times 17

= $85,000

Since the increase in income is greater than the cost of going to college, Ruby should go to college.

4 0
3 years ago
Coronado University sells 5,900 season basketball tickets at $210 each for its 12-game home schedule.
katen-ka-za [31]

Answer:

Explanation:

The journal entries are shown below:

a. Cash A/c Dr $1,239,000     (5,900 seasons × $210)

          To Unearned basket ball tickets revenue $1,239,000

(Being the sale of the season tickets are recorded)

b. Unearned basket ball tickets revenue $103,250      ($1,239,000 ÷ 12)

               To basket ball tickets revenue $103,250    

(Being the revenue recognized)

7 0
3 years ago
The Blueberry Designs ads show a lifestyle that is sophisticated and timeless. They recently launched a sportswear line with the
kap26 [50]

Answer:

A reference group

Explanation:

Reference groups are are set of people who are used as a standard for how to comply with social norms thereby influencing our ideas, values, behaviour, and appearance.

For example a reference group can be a set of people that have achieved a certain level of importance in a field by following a standard.

In the given scenario Blueberry Designs ads show a lifestyle that is sophisticated and timeless.

Those that follow the standards set by Blueberry designs can be said to be a reference group

3 0
3 years ago
Your younger sister, Linda, will start college in five years. She has just informed your parents that she wants to go to Hampton
Elden [556K]

Answer:

The answer $6,964.4726324 per year  

Explanation: The following elements are to be considered in this case:

- The total amount required for Linda's education is $132,000 ($33,000*4)

-Parents had already started investing $5,300 per year for the past five years. This is a stream of even cash flows, at an interest rate. Considering we are at the point before our parents decided to invest the $5,300 and we want to determine the future value of this fixed payments, we will consider the formula below:

Future Value FV = Cash flow per period C * ([1 + i]^n - 1 )/i where  i is the interest rate and n the number of times or periods

FV= $5,300 * ([1 + 0.11]^5 - 1 )/0.11

FV= $5,300 * 6.22780141

FV= $33,007.347473

Considering they will continue to save $5,300 for five more years, we can adjust the above formula and obtain the future value of the fixed payment of $5,300 over a period of 10 years

FV= $5,300 * ([1 + 0.11]^10 - 1 )/0.11

FV= $5,300 * 16.722008965

FV= $88,626.647515

This implies our parents will have the above amount when Linda is to start college and will require an additional $43,373.35248 ($132,000 - $88,626.647515 ) to have the entire fees at hand.

Now, we have to determine how much should be saved every year for the next five years (when Linda starts school) in order to obtain the amount left to complete Linda's fees.

Considering the formula above, it should be noted that we alraedy know the future value, the interest and the number of years involved. So to get the cash flow or amount to be saved per period,

- Cash Flow per period C = Future value FV/  ([1 + i]^n - 1 )/i

 C = $43,373.35248 /  ([1 + 0.11]^5 - 1 )/0.11

 C = $43.373.35248 / 6.22780141

 C = $6,964.4726324

Thus, in addition to the $5,300 currently being saved by our parents, they will have to save an additional $6,964.4726324 per year so as to obtain the total amount for Linda fees of $132,000 which will be divided into $33,000 per year.

3 0
3 years ago
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dezoksy [38]
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Hope this helped!
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