Introduction to Corporate Finance

PART 2: VALUATION, RISK AND RETURN

ASSIGNMENT

1 Using the probabilistic approach, calculate the

expected rate of return for Tech.com, Sam’s Grocery

and the ASX 200 Index.

2 Calculate the standard deviations of the estimated rates

of return for Tech.com, Sam’s Grocery and the ASX 200

Index.

3 Which is a better measure of risk for the ordinary

shares of Tech.com and Sam’s Grocery – the standard

deviation you calculated in Question 2 or the beta?

4 Based on the beta provided, what is the expected rate

of return for Tech.com and Sam’s Grocery for the next

year?

5 If you form a two-share portfolio by investing $30,000

in Tech.com and $70,000 in Sam’s Grocery, what is the

portfolio beta and expected rate of return?

6 If you form a two-share portfolio by investing $70,000

in Tech.com and $30,000 in Sam’s Grocery, what is the

portfolio beta and expected rate of return?

7 Which of these two-share portfolios do you prefer?

Why?

> >

mini case

ONLINE STUDY TOOLS

Visit http://login.cengagebrain.com and use

the access code that comes with this book for

12 months’ access to the resources and study

tools for this chapter. The CourseMate website

contains:

Smart concepts – step-by-step explanations of

concepts

» See a discussion of portfolio theory

short selling.

» See a demonstration of the CAPM.

» Learn more about market efficiency.

Smart solutions – step-by-step explanations of

problems

Smart videos

» Andrew Karolyi, Cornell University

» William Sharpe, Stanford University, Co-

founder, Financial Engines

» Todd Richter, Managing Director, Head

of Equity Healthcare Research, Bank of

America Securities

Interactive quizzes

Audio

Flashcards and more.