Investment and Net Asset Value

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Assignment 1

1.Suppose you discover a treasure chest of RM10 billion in cash

a. Is this a real or financial asset?

b. Is society any richer for the discovery?

c. Are you wealthier?

d. Is anyone worst off as a result of the discovery?

2.The average rate of return on investment in large stocks has outpaced that on investments in T-Bills by about 8% since 1926 in US. Why, then, does anyone invest in T-Bills?

3.You see an advertisement for a book that claims to show how you can make RM1 million with no risk and with no money down. Will you buy the book? Why?

4.You are bullish on Telekom stock. The current market price is RM50 per share, and you have RM5,000 of your own to invest. You borrow an additional RM5,000 from your broker at an interest rate of 8% per year and invest RM10,000 in the stock.

a.what will be your rate of return if the price of Telekom stock goes up by 10% during the next year? (ignore dividend)

b.How far does the price of Telekom stock should have fall for you to get a margin call if your maintenance margin is 30% of the value of the short position?

5.The composition of the Fingroup Fund portfolio is as follows:

|Stock |Shares |Price (RM) | |A |200,000 |35 | |B |300,000 |40 | |C |400,000 |20 | |D |600,000 |25 |

The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals RM30,000. There are 4 million shares outstanding. What is the net asset value of the fund?

6.You are considering the choice between investing RM50,000 in a conventional 1-year bank FD offering an interest rate of 5% and a 1 year “Inflation-Plus” FD offering 1.5% per year plus the rate of inflation.

a.Which is the safer investment?

b.which offers the higher expected return?

c.if you expect rate of inflation to be 3% over the next year, which is the better investment? Why?

d.if we observe a risk-free nominal interest rate of 5% per year and a risk free real rate of 1.5% on inflation-indexed bonds, can we infer that the market’s expected rate of inflation is 3.5% per year?

7. You purchased a share of stock for $30. One year later you received $1.50 as dividend and sold the share for $32.25. What was your holding period return? 

8. You have been given this probability distribution for the holding period return for KMP stock:

 [pic] 

a.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? 

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? 

10. Discuss briefly the advantages and disadvantages of common stock ownership, relative to other investment alternatives. 

11. Discuss some reasons why an investor with a long time horizon might choose to invest in common stocks, even though they have historically been riskier than government bonds or T-bills. 

12.Calculate the arithmetic men and geometric mean returns of the following:

| Year |Annual Return (%)...
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