# Financial Management FIN 534 Corporate Finance 2008 Custom Edition

Financial Management FIN 534 Corporate Finance 2008 Custom Edition

Chapter 10 Problems 2, 13, 19, 22

2. The table below shows the one-year return distribution of Startup Inc. Calculate

a. The expected return.

b. The standard deviation of the return.

13.

Consider an economy with two types of firms, S and I. S firms all move

together. I firms move independently. For both types of firms, there is a

60% probability that the firms will have 15% return and a 40%

probability that the firms will have a -10% return. What is the

volatility (standard deviation) of a portfolio that consists of an equal

investment in 20

a. Type S firms?

b. Type I firms?

19. Suppose the market portfolio is equally likely to increase by 30% or decrease by 10%.

a.

Calculate the beta of a firm that goes up on average by 43% when the

market goes up and goes down by 17% when the market goes down.

b.

Calculate the beta of a firm that goes up on average by 18% when the

market goes down and goes down by 22% when the market goes up.

c. Calculate the beta of a firm that is expected to go up by 4% independently of the market.

22.

Suppose the market risk premium is 6.5% and the risk-free interest rate

is 5%. Calculate the cost of capital of investing in a project with a

beta of 1.2

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