Investment and Rate Essay

1801 Words Mar 4th, 2013 8 Pages
1. Suppose you discover a treasure chest of RM10 billion in cash
a. Is this a real or financial asset?
Yes. 10 billion cash is the financial asset. This is because financial assets only obtain its monetary value from a contractual agreement of what it represents. In contrast, real asset itself has the physical value.
b. Is society any richer for the discovery?
No. This is because the cash does not contribute to the productive capacity of the economy.
c. Are you wealthier?
Yes. You would become wealthier with RM10 billion cash.
d. Is anyone worst off as a result of the discovery?
Yes. The society as a whole is worse off. This is because cash is the financial asset and it becomes is a
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What is the expected holding period return for KMP stock?
b. What is the expected standard deviation for KMP stock?
c. What is the expected variance for KMP stock?
a. Expected Holding Period Return = (0.30 X 18%)+(0.50 X 12%)+(0.20 X -5%)
= 10.4%
b. Expected Variance = [0.30 X (18%-10.4%)2]+ [0.50 X (12%--10.4%)2]
+ [0.20 X (-5%-10.4%)2]
= 66.04%
c. Expected Standard Deviation = [66.4]1/2
= 8.13%
9. A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6 percent. An investor has the following utility function: U = E(r) - (A/2)s2. What is the value of A which makes this investor indifferent between the risky portfolio and the risk-free asset?
E(r)= 0.15 ; Rf =6%
Standard Deviation = [S2]1/2
(0.15)2 = S2
Variance, S2 =0.0225
U = E(r) - (A/2) S2
0.06 = 0.15- (A/2) 0.0225
A = 8
10. Discuss briefly the advantages and disadvantages of common stock ownership, relative to other investment alternatives.
• The risk to hold the common stock is higher as compared to other investment alternatives such as bond. However, common stocks have the advantage of having high earning potential than other alternative investments such as bonds and certificates of deposits (CD).
• Most of the common stocks are very liquid. Therefore, the common stockholders can be bought and sold the shares

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