Sample Question for Final Exam

THE FOLLOWING INFORMATION RELATES TO QUESTIONS 1 - 5

Davo Corp Ltd is a large investment company, which has investments in two of the following industries: | ExpectedReturn| Beta| Covariance withthe Market| Standard Deviation| Mining| ?| ?| 0.068| 0.50|

Transport| 0.14| 1.5| ?| ?|

Building| ?| 2.0| ?| ?|

Alcohol| ?| ?| 0.032| 0.35|

Market Index| ?| 1| ?| 0.20|

The ten-year bond rate (risk free rate) is 5%. The proportion of the two industries in Davo Corps investment portfolio is as follows: Mining 60% and Alcohol 40%.

QUESTION 1

What is the beta of Mining?

QUESTION 2

What is the expected return on the market?

QUESTION 3

If the firm wanted to restructure its investment portfolio so that it invested equally in all four industry sectors, what would be the covariance of Davo with the market?

QUESTION 4

You construct a portfolio by buying a 55% investment in Alcohol and 45% in Mining. The correlation between the two assets is .48. Provide calculations to show whether this new portfolio is efficient.

QUESTION 5

As each industry invested in will contribute to the variance of Davo Corp Ltd as a whole, the variance of Davo Corp's returns may be calculated as the weighted mean of the individual variances. Choose the most correct answer.

(a)True. The variance of the portfolio is the weighted sum of the variances of the individual assets that comprise the portfolio.

(b)False. The variance of the portfolio will be less than the variances of the individual assets that comprise the portfolio.

(c)False. The variance of the portfolio will be less than the weighted variances of the individual assets that comprise the portfolio if the correlation of the portfolio with the market is less than one.

(d)False. The variance of the portfolio will be less than the variances of the individual assets that comprise the portfolio if the correlation between assets that comprise the portfolio are less than one.

(e)False. The variance of the portfolio will be less than the weighted variances of the individual assets that comprise the portfolio if the correlation between assets that comprise the portfolio are less than one.

(f)False. The variance of the portfolio will be less than the weighted variances of the individual assets that comprise the portfolio if the correlation between assets that comprise the portfolio are less than one, thus showing the advantage of diversification.

(g)False. The variance of the portfolio will be less than the weighted variances of the individual assets that comprise the portfolio only if the correlation between assets that comprise the portfolio is negative one.

QUESTION 6

A travelling sales representative is making the decision of how often the company car should be replaced. The present value of the costs (after tax) of maintaining a motor car for various periods of time has been calculated as follows:

One Year ($4,891)

Two Years ($8,691)

Three Years($12,176)

Four Years($14,005)

Five Years($15,621)

If the cost of capital is 20%, what is the optimal replacement time? Show calculations to support your answer.

QUESTION 7

A project has a Net Terminal Value Index of 0.169, with the present value of cash inflows being $7564. What is the Net Present Value of the project?

QUESTION 8

What is the present value of an outlay of $1213 that is to occur in four years time and is repeated every two and one half years in perpetuity? The interest rate is J2 = 20%

QUESTION 9

An investment in land requires an outlay of $14,250 and it returns (via rent) $5,000, $4,000, $3,000 and $6,000 in years one to four respectively. Calculate both the payback and the accounting rate of return for the investment.

QUESTION 10

Sam has the following investment opportunity available to him. What is the...