## (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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