Present Value and the Risk/Return Trade-OffAssignment Overview
For this assignment, make sure to first carefully review all of the required readings about present value, future value, risk and return, and the CAPM. Once you are relatively comfortable with these concepts, try working through some of the examples in the background readings and try computing the answers on your own. Once you are confident you both understand the concepts and the computational steps, complete the assignment below.
Case Assignment
Present your answers to the problem below in a Word document, and also upload an Excel file with your computations. Excel is required for Questions 2 and 3. Excel is optional for Questions 1 and 4, but you are required to show your steps for all quantitative problems. Even if you get the answer wrong, you can still get partial credit if you show your work.
- Calculate the following:
- Suppose you won the lottery but not all of your winnings will come in one year. Instead, you will get a series of annual payments over the next five years. The table below tells you what your payment will be every year for the next five years. Use the information in the table to make the following computations:
Year
Payment
1
5000
2
6000
3
7000
4
8000
5
9000
- The table below gives the probability of different returns for three different assets. Using this table, calculate the following:
Asset A
Asset B
Asset C
Probability
Return
Probability
Return
Probability
Return
0.3
5
0.1
25
0.1
4
0.4
8
0.3
20
0.8
5
0.3
9
0.5
15
0.1
6
0.1
14
- Suppose the market return is 8%, the risk-free rate is 1% and the beta for a given stock is 1.2. Answer the following questions based on this information:
- Suppose there are three different companies. The first one, Trendy Tech Inc., has investors who are “fair-weather friends.” When the stock market is going up, everybody wants to invest in Trendy Tech, but as soon as the market goes down everyone jumps ships and sells their shares. The second company is Oily Oil Inc. Oily’s stock price seems to depend only on the price of oil and nothing else. Finally, there is Conglomerated Conglomerate Inc. Conglomerated is a giant company with holdings in almost every industry imaginable—from cell phones to grocery stores and even amusement parks. Based on this information, which company would you think has the highest beta? The lowest beta? Which one do you think has a beta closest to 1?
Assignment Expectations
- Answer the assignment questions directly.
- Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
- For computational problems, make sure to show your work and explain your steps.
- For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. Citation and reference style instructions are available at Trident University’s Introduction to APA Style, 7th edition . Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.
