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Financial Economics and Capital Markets Seminar 2
发布时间：2022-01-10
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Financial Economics and Capital Markets
Seminar 2
Exercise 1
a) A project generates a sequence of cash flows as follows
|
T0 |
T1 |
T2 |
|
-£3000 |
£9000 |
-£5000 |
Calculate the IRR of the project and explain the difficulties with the IRR method in this case.
b) Explain why, if two projects are mutually exclusive, conflict may arise
between NPV and IRR methods. If conflict exists, how should the capital budgeting decision be made?
c) Explain the delayed investment problem and its impact on IRR method.
Exercise 2
Bob has invested 60% of his money in share A and the remainder in share B. He
assesses their prospects as follows:
|
|
A |
B |
|
Expected return |
15% |
20% |
|
Standard deviation |
20% |
22% |
|
Correlation between returns |
0.5 |
|
a) What are the expected return and standard deviation of his portfolio?
b) How would your answer change if the correlation coefficient was 0 or -0.5?
c) Is Bob’s portfolio better or worse than one invested entirely in share A, or is it not possible to say?
Exercise 3
Consider a world with the following two risky assets; a stock fund and a bond fund. Their expected returns and standard deviations are as follows:
|
|
Expected Return (%) |
Standard Deviation (%) |
|
Stock fund |
20 |
30 |
|
Bond fund |
12 |
15 |
The correlation between two assets is 0.10.
a) Find Expected Return and Standard Deviation for the portfolios with the combination of the stock fund and bond fund at (25%, 75%), (50%, 50%), (75%, 25%) respectively.
b) Find the portfolio with the two assets that has minimum variance and compute the expected return and standard deviation of the obtained portfolio.
c) Describe the efficient set of the investment portfolios in graph, and explain why the portfolio is able to provide better expected return at same risk level.
d) Suppose risk free borrowing and lending is allowed, and the yield on T-bills is 8%, draw the capital market line to the efficient set, and explain your investment strategy given you are risk averse.
