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(solution) 1. Jordan Jessup is planning to invest $25,000 in a mutual fund


  • 1. Jordan Jessup is planning to invest $25,000 in a mutual fund that will provide a return of 8% per year. What will be the value of the investment at the end of 10 years?
  • 2. You are in desperate need of cash and you turn to your uncle who has offered to lend you some money. You decide to borrow $1,300 and agree to pay back $1,500 in two years. Alternatively, if you borrow from your bank they will charge 6.5% interest per year. Which is the best plan?
  • 3. Zepher Manufacturing Co. has sales of $1,125 million. They expect sales to grow at the rate of 6.5% annually. How long will it take for sales to double?
  • 4. Lucy Linder can receive a bonus of $1,820 today, or $2,100 in two years. If she takes the $1,820 bonus she can invest it at 6% per year at her company credit union. Which is best?
  • 5. One year ago you purchased 100 shares of Office Max for $12 per share. Today you sold it for $18 per share. It paid no dividends. What was the holding period risk?

6. The local real estate market is heating up and you have purchased a residential dwelling for $100,000 that you plan to flip in one year. The following are possible future prices and the probabilities: $80,000 at 10%, $110,000 at 30%, $125,000 at 50%, and $130,000 at 10%.Compute the Expected Rate of Return.

  • 7. Describe how investing in more than one asset can reduce risk through diversification?
  • 8. Calculate the slope or beta where the following facts exist: In Year 1 a share of IBM stock increased 8%, and in Year 2 it increased 10%. At the same time the S&P index increased 5% in Year 1 and 7% in Year 2.. Once calculated, explain what your answer means.
  • 9. Calculate the expected rate of return using the CAPM where the expected return on the market is 5%, the risk free rate is 1%, and the beta is 1.5.

 


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