Bethesda Water has an issue of preferred stock outstanding with a coupon rate of 6.20 percent that sells for $97.26 per share. Calculating beta on your own can also be educational because it allows you to examine price movements in great detail. The first measure provides an equals the average covariance: Variance portfolio beta. general, we expect a stocks price to change by an amount equal to (beta The firm expects to earn excess cash of $68,000 this year after all expenses, taxes, and dividends are paid. the standard deviations are irrelevant. 30[(0.1)(0.1)(0.3)(0.4)(0.4)] = 0.063680, Thus, the proportion is portfolios to see which is the lowest. WebThe CAPM assumes that investors hold fully diversified portfolios. If shares are being considered, E(rm) is the required return of equity investors, usually referred to as the cost of equity. This can also be simplified to: What will be the market price per share after the dividend? Thats when beta becomes important. Annual interest tax shield = $41,400. RE = $3.93(1.0370)/$70.89 + .0370RE = .0945, or 9.45% 1. 2 components of international diversification of portfolios, potential risk reductions and potential added foreign exchange risk, the initial focus on international portfolio diversification is on, portfolio Beta, ratio of tha variance of a portfolios return, as an investor adds securities to a portfolio what happens to portfolio risk, it declines rapidly at first then approaches the level of systematic risk, what is the beta for a fully diversified portfolio, what are the two elements of risk that comprise a portfolio, systematic (market) risk and unsystematic ( individual securities aka diversifiable risk), How are the two elements of portfolio risk affected when the number of shares in a portfolio increases, it will reduce unsystematic risk and leave systematic risk unchanged, when an investor begins to diversify a portfolio internationally what happens to the portfolio's beta and ultimately, the portfolios beta is lowered represented by a downward shift in the SML, and risk is ultimately lowered to a new lowest possible level, securities portfolios as well as a portfolio of activities of an MNE contain foreign exchange risk which can be reduced with, give an examole of how one could internationally diversify, by purchasing assets in foreign markets, in foreign currencies, because it may alter the correlations associated with securities in different countries and currencies, the risk associated with international diversification becomes more complex when exposed to, what affect does international diversification benefits have on investors, it induces them to demand foreign securities, investor demand for foreign securities, the increased benefits of diversification cause demand to rise, how does a foreign security add value to a portfolio, if it either reduces risk for a given level of return oor increases return for a given level of risk, what occurs when investors realize a security adds value to a portfolio, investor demand for thee security will rise, and in turn so will the price of the security, ultimately resulting in a lower cost of capital for the firm, will accept some but not unnecessary risk, a typical investor seeks a portfolio that, maximizes expected portfolio return per unit of portfolio risk, the near infinite set of portfolio combinations of domestic securities form the, line along the extreme left edge of a portfolio opportunity set, optimal set of prtfolios of securities possesing minimum risk per each level of return, along the efficent frontier, the portfolio with the minimum risk is known as, the risk free asset and a portfolio of domestic securities on the efficient frontier, to find DP begin with the risk free asset and move, the DP is defined as optimal domestic portfolio because, it moves out to a risky space at the steepest slope, what happens to the domestic opportunity set as international diversification is introduced, it shifts leftward and becomes the internationally diversified opportunity set, why is the internationally diversified opportunity set of lower expected risk than comparable domestic portfolios, the gains arise directly from the introduction of additional securities and/or portfolios that are of less than perfect correlation with the securities and portfolios in the domestic opportunity set, the optimal international portfolio IP is found by, locating the point on the CML which extends to the risk free asset to a point of tangency along the internationally diversified efficient frontier, benefits of internationalizing the domestic portfolio, higher expected return with lower risk than the domestic portfolio alone, when can an investor reduce investment risk by holding risky assets, as long as the asset returns are not perfectly positively correlated investor can reduce risk, why can a non perfectly correlated risky asset decrease portfolio risk, the fluctuations in returns will offsset one another, 2 security portfolio standard deviation (risk measurement), SDp=W1squared*SD1squared + W2squared*SD2squared + 2(W1*W2)Cov(r1,r2), Cov(r1,r2) = correlation coefficient of returns(1,2)*SD1*SD2, what is the range of values for correlation coefficent, where is the true benefit of global diversification arise from, the fact that markets around the world arent perfecctly positively correlated, why are global markets not perfectly positively correlated, varying industril structures and varying economic cycle peaks and troughs, correlation levels US and most other countries is well below one, but which country is higher than average, correlations differ across sub periods but seem to be, rising over time(i.e. The correlation coefficient has a range of. In equilibrium, every investor holds a fully-diversified portfolio having some amount of all the capital assets in the market. Oll. Priscilla does not want any dividend income this year but does want as much dividend income as possible next year. Weba. A fully diversified domestic portfolio has a beta of. Jasmine's Boutique has 2,000 bonds outstanding with a face value of $1,000 each, a market value of $1,060 each, and a coupon rate of 9 percent. deviation = sP is true that stocks offer higher long-run rates of return than bonds, but it is

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