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Saving cash in the bank is not as attractive as it was in the past, and Large Rock is looking
to invest some of its surplus cash. In a meeting with senior managers in the company, you
mention the Modern Portfolio Theory which was pioneered by Markowitz.
Explain
a. The purpose of the Markowitz Portfolio Theory,
b. Who would benefit from this theory,
c. What is the key component of the theory
Step by step
Solved in 4 steps
- Derive CAPM and explain the concept of systematic risk. Explain the notion of geometric Brownian motion and hence derive Ito’s lemma. Narrate how inflation impacts present value of cash flow. What do you mean by ‘beauty contest’ and discuss its impact on investment decision of investors in stock market.a) Return calculations For each of the investments shown in the table(Attached), calculate the rate of return earned over the unspecified time period. b) ETHICS PROBLEM Risk is a major concern of almost all investors. When shareholders invest their money in a firm, they expect managers to take risks with those funds. What do you think are the ethical limits that managers should observe when taking risks with other people’s money?Describe an investment strategy that tries to grow money. You can only use for the description terms like such as day trading, short term and long term investing, risk- averse, risk tolerant etc.
- Explain how you will apply in real life the following AXIOMS of FINANCIALMANAGEMENT AXIOM 1: RISK-RETURN TRADE OFFAXIOM 2: TIME VALUE OF MONEYAXIOM 3: CASH NOT PROFIT IS KINGAXIOM 4: INCREMENTAL CASH FLOWSAXIOM 5: EFFICIENT CAPITAL MARKETSAXIOM 6: THE CURSE OF COMPETITIVE MARKETSAXIOM 7: AGENCY PROBLEMAXIOM 8: TAXES BIAS BUSINESS DECISIONSAXIOM 9: ALL RISK IS NOT EQUALAXIOM 10: ETHICAL BEHAVIOR IS DOING THE RIGHT THING AND ETHICALDILEMMAS ARE EVERYWHERE IS FINANCE.Help meQUESTION 1 (a) Elaborate on business risk and financial risk. Suppose Firm A has greater businessrisk than Firm B. Therefore, Firm A should have a higher cost of equity capital.Justify.(b) Gigi considered constructing a portfolio for herself, discuss which school of thoughtwould be practical for her portfolio, the Traditional or Modern Portfolio Theory.(c) Dividends are important, but at the same time, dividend policy is irrelevant. Justify.
- Answer quickly After making an investment, an investor learns that Intel stock is now undervalued. This is an illustration of a. Market Interruption b. Portfolio Management c. Security Analysis d. Asset Allocationhow do banks improve their net profit margin to increase Return on Equity? what are the risk implications ?1. Which of the following statements are true?a. The value of any investment is based on the cash flows it is expected to generate in the future.b. Investors are not generally risk averse.c. Uncertain cash flows are preferred to certain cash flows.d. All of the above are true.e. None of the above are true. 2. A basic knowledge of finance will help you with your personal investments by helping you understanda. how to accurately predict changes in the short-term interest rates.b. how to determine the optimal dividend policy for each firm.c. how to determine which technology is most likely to be accepted by consumers.d. how to review companies and industries to determine their prospects for future growth and therisk inherent in those companies and industries.e. how to predict the growth in sales for the firm. 3. Which of the following events would make it more likely that a company would choose to call itsoutstanding callable bonds?a.A reduction in market interest rates.b.The company's…
- Which of the following is a constrain for the investors? a. The mentality tontake the high risk b. Tax exemption on security trading c. Getting high income d. Liquidity needsInvestors invest in a firm because they are motivated by the potential return on their investment. In evaluating a firm's potential for delivering that rate of return, what do they most look for in a firm's projections? The firm's ability to pay dividends The firm's plans to stock up on inventory in order to never run out of stock The firm's plans to extend credit terms to customers in order to gain more sales The firm's ability to generate cash by liquidating its marketable securities portfolioDescribe a strategy development as you try to grow your money. Remember to mention day trading, short and long-term investments, risk- averse, risk tolerance, etc.