Question

Suppose you currently hold stock in an automobile company. Which of the following stocks should you purchase if you want to reduce the risk of your portfolio as much as possible? options:

	Stock in a manufacturer of construction steel.
	An oil stock.
	A railway stock.
	Stock in another automobile company.
	A gold mining stock.

Xanth Corporation is a Canadian Company. They have an income statement that includes the following data: Cost of Goods Sold = $80,000; Income Taxes = $10,000; Administrative Expenses = $5,000; Interest Expense = $3,000; Depreciation Expense = $4,000. Their average tax rate was 20%. No depreciation expenses is included in cost of goods sold or administrative expenses. What is Xanth Corporation's Net Income? options:

	$40,000
	$58,000
	$75,000
	$50,000

Calculate the real rate of interest if the nominal rate of interest is 2.5% and the inflation rate is 5.5%. options:

	8.00%
	-2.93%
	-3.00%
	-2.84

Priti's Fine Dining is a restaurant that is expecting the following performance next year. There is a 20% probability of a boom market next year, and if that occurs, Priti share value will increase to $150 and they will pay a $6 dividend. There is a 40% probability of a normal economy and if that occurs, Priti's share value will grow to $80 and they will pay a $3 dividend. There is a 40% probability of a recession and if that occurs, Priti's share value will drop to $20 and they will pay a dividend of $1. The stock is selling today for $60. What is the expected rate of return of Priti's Fine Dining? options:

	45.67%
	60.00%
	16.67%
	21.33%

Which of the following terms would be used to refer to a bond with a AA rating?options:

	Investment grade.
	Junk Bond.
	Risk-free grade.
	High-yield.
	Speculative grade.

What is the yield to maturity of a bond with the followign characteristics? The coupon rate is 8% with semi-annual payments. The current price is $1200 and there are 10 years left until maturity.options:

	5.39%
	8.00%
	4.00%
	2.69%

Answer 1

If one currently holds stock in an automobile company,  to reduce the risk of portfolio as much as possible, one should invest in a completely unrelated sector or in a negatively related sector. A decrease in demand of automobiles may decrease the demand of steel as well as oil. So, the value of steel stock and oil stock are related to Automobile stock. Railway also belongs to the logistics sector. Gold mining stock is the best option to reduce the risk of the portfolio as it is completely unrelated.

Let $X be the total Sales Revenue of Xanth Corporation,

Total Earnings before Tax = X - 80000 - 5000 -4000 - 3000 =X- 92000

Tax@20% = 0.2* (X-92000) = 10000

=> X= $142000

Net Income = 0.8* (X-920000 = $40000

Real rate of interest = (1+ nominal rate of interest)/(1+inflation rate)-1

= 1.025/1.055-1

= -0.028436 or -2.84%

Expected value of Share = 20%*$150+40%*$80 + 40%*$20 = $70

Expected value of Dividend = 20%*$6+40%*$3 + 40%*$1 = $2.80

Expected rate of return = ($70+$2.80-$60)/$60 = 0.21333 or 21.33%

A Bond with AA rating is considered to be Investment grade bond

Apx. semiannnual YTM (y) is given by y =  (C+(M-P)/N)/(0.4*M+0.6*P)

Where:

C    = the annual interest payments

M = the maturity (face) value of the bond

P   = the current market price of the bond

N = the number of years to maturity

y= (40+(1000-1200)/20)/(0.4*1000+0.6*1200)

=0.02678571

So, Annual YTM = 2*0.02678571 =0.053571 or 5.36%

Correct YTM = 5.39% can be found by solving the equation

40/(y/2) *(1-1/(1+y/2)^20) + 1000/(1+y/2)^20 = 1200