Consider the information below relating to the monthly rates of return for two companies X and...

Consider the information below relating to the monthly rates of return for two companies X and Y over a period of 4 months:		Y
xRate of return			yRate of Return
Date
Month 1	-4.76			-4.75
Month 2	5.34			7.65
Month 3	12.09			6.98
Month 4	-2.98			9.65

Calculate the covariance per month between the two companies. Show all your working.

If a firm increases its financial risk by selling a large bond issue that increases its financial leverage explain this assumption? Also what is the relationship between risk and return. Explain with examples.

Expert Solution

A firm has to have a balance of Debt to Equity Ratio therefore when it issues a debt like a bond where in they are required to pay interest on regular intervals that will in turn increase their leverage.

Example if Debt was 500 and Equity was also 500 the Ratio is 1:1 , but if additional debt of 500 is raised/issued the Equity becomes 2:1.

Risk and Return -

An example of Risk and Return can be explained with the Option Contracts

For Example , if we buy 1 Lot Call Option of Apple which is currently trading at $100 and we assume it might go upto $120 by the current month Option Expiry. 1 Lot has 1000 shares and Strike Price/Exercise Price is $110.

The premium of buying the Option is only $1 *1000 which is $1000 , which is the maximum loss that the option buyer will incur

If the Price goes to $120, the buy will earn $ 20000 -1000(Premium Paid) = $19,000

but if the Option Expired less then the Strike , buyer will lose the $1000

jeff jeffy answered 2 years ago

Consider the following information on the expected return for companies X and Y. Economy Probability X...

Consider the following information on the expected return for companies X and Y. Economy Probability X Y Boom 0.24 33 % 18 % Neutral 0.59 11 % 22 % Poor 0.17 −35 % 4 % a. Calculate the expected value and the standard deviation of returns for companies X and Y. (Round intermediate calculations to at least 4 decimal places. Round your final answers to 2 decimal places.) b. Calculate the correlation coefficient if the covariance between X and...

2. In the table below is information for two companies: $000)

2. In the table below is information for two companies: $000) Company K Company L Net sales(revenues 21,472 23,314 Cost of goods sold 13,050 5,192 Average inventory 350 457 Average accounts receivable 1,837 4,996 Average accounts payable 2,025 1,048 Turnover days Days inventory outstanding 37 32 Days sales outstanding 31 78 Days payable outstanding 61 75 Total assets 12,500 12,000 Cash conversion cycle From the above data, make the observations about the relative performance and determine better-performed company. (Remember that...

Consider the monthly returns of two risky assets. The return of the first asset has a...

Consider the monthly returns of two risky assets. The return of the first asset has a mean of 2% and standard deviation of 3%. The return of the second asset has a mean of 1.5% and standard deviation of 2%. The correlation coefficient of the two returns is 0.3. How can the minimum variance portfolio (MVP) be constructed? What are the mean and standard deviation of the return of the MVP? Consider a portfolio with 50% invested in asset 1...

The table below gives statistics relating to two stocks. Mean Annual Return (%) Standard Deviation of...

The table below gives statistics relating to two stocks. Mean Annual Return (%) Standard Deviation of Return (%) Skewness Excess Kurtosis Stock A 11.5 5.5 -0.45 -0.5 Stock B 12.0 8.5 0.25 2.5 Based on the information in the table, contrast the distribution of returns of Stock A and B. Evaluate the relative attractiveness of Stock A and B

The table below is the Monthly return Correlation Coefficients between two stocks: RIO & ANZ 0.6162...

The table below is the Monthly return Correlation Coefficients between two stocks: RIO & ANZ 0.6162 RIO & WES 0.7593 RIO & TLS -0.6850 ANZ & WES 0.5970 ANZ & TLS -0.1865 WES & TLS -0.5192 Required: a. Which pair of two stocks have the highest and lowest correlations? b. Suggest some economic reasons to explain the high and low correlation between these stocks. If you were to form a portfolio of two stocks, which ones would you choose to...

Consider two companies, A and B who can borrow at the following annualised rates: Fixed Floating...

Consider two companies, A and B who can borrow at the following annualised rates: Fixed Floating Company A 4.5% 6 month LIBOR + 0.1% Company B 6.0% 6 month LIBOR + 0.6% a) Suppose Company A wants to borrow floating and Company B wants to borrow fixed. What is the potential gain if they enter into a swap? Show your calculations. b) Design a swap in which the gain from the swap is divided equally between the two companies. Show...

1) Consider the following two assets that have rates of return in three equally likely scenarios:...

1) Consider the following two assets that have rates of return in three equally likely scenarios: Scenario M (market) A Strong Growth 15 9 Weak Growth 5 -5 Recession -5 5 a) What is the expected return of each asset? b) What is the risk of each asset when viewed in isolation (standard deviation)? c) Assuming that investors currently hold asset M, what is the risk of asset A in the portfolio sense (beta)?

Problem 6-03 The following are the monthly rates of return for Madison Cookies and for Sophie...

Problem 6-03 The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period. Month Madison Cookies Sophie Electric 1 -0.02 0.06 2 0.06 -0.02 3 -0.07 -0.10 4 0.09 0.18 5 -0.02 -0.06 6 0.05 0.02 Compute the following. Do not round intermediate calculations. Round your answers to four decimal places. Average monthly rate of return R̅i for each stock. Madison Cookies: Sophie Electric: Standard deviation of returns for each stock. Madison...

Consider stocks of two companies A and B, the table below gives their expected returns and...

Consider stocks of two companies A and B, the table below gives their expected returns and standard deviation Expected return for Stock A 10% Expected return for Stock B 25% Standard deviation for Stock A 12% Standard deviation for Stock B 30% Plot the risk and expected return of portfolio of these two stocks for the following correlation coefficient : -1.0,-0.5,0.0,0.5,1.0

The table below shows the information for exchange rates, interest rates and inflation rates in the...

The table below shows the information for exchange rates, interest rates and inflation rates in the US and Germany. Answer the following questions Current spot rate: $1.35/€ One-year forward rate: $1.30/€ Interest rate in the US: 4% Interest rate in Germany: 5% Inflation rate in the US: 3% Inflation rate in Germany: 3.5% (a) If you borrowed $1,000 for 1 year, how much money would you owe at maturity? (2 mark) (b) Find the 1-year forward exchange rate in $...

Question