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1. UOP FIN 486 Week 2 Individual Assignment (Chapter 5, Chapter
8) NEW
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FIN 486 Week 2 Individual Assignment (5-1,5-4,5-5,5-8,5-10,5-
17,5-21,P8-3,P8-4,P8-9,P8-10,P8-13,P8-24,P8-25,P8-26)
P8–3 Risk preferences Sharon Smith, the financial manager for
Barnett Corporation, wishes to evaluate three prospective
investments: X, Y, and Z. Sharon will evaluate each of these
investments to decide whether they are superior to
investments that her company already has in place, which have
an expected return of 12% and a standard deviation of 6%. The
expected returns and standard deviations of the investments
are as follows:
a. If Sharon were risk neutral, which investments would she
select? Explain why.
b. If she were risk averse, which investments would she select?
Why?
c. If she were risk seeking, which investments would she select?
Why?
d. Given the traditional risk preference behavior exhibited by
financial managers, which investment would be preferred?
Why?

2. Investment Expected return Standard deviation
X 14% 7%
Y 12 8
Z 10 9
P8–4 Risk analysis Solar Designs is considering an investment
in an expanded product line. Two possible types of expansion
are being considered. After investigating the possible
outcomes, the company made the estimates shown in the
following table.
Expansion A Expansion B
Initial investment $12,000 $12,000
Annual rate of return
Pessimistic 16% 10%
Most likely 20% 20%
Optimistic 24% 30%
a. Determine the range of the rates of return for each of the two
projects.
b. Which project is less risky? Why?
c. If you were making the investment decision, which one would
you choose? Why? What does this decision imply about your
feelings toward risk?
d. Assume that expansion B’s most likely outcome is 21% per
year and that all other facts remain the same. Does your answer
to part c now change? Why?
P8–9 Rate of return, standard deviation, and coefficient of
variation Mike is searching for a stock to include in his current
stock portfolio. He is interested in Hi-Tech, Inc.; he has been
impressed with the company’s computer products and believes
that Hi-Tech is an innovative market player. However, Mike
realizes that any time you consider a technology stock, risk is a
major concern. The rule he follows is to include only securities
with a coefficient of variation of returns below 0.90.
Mike has obtained the following price information for the
period 2012 through 2015. Hi-Tech stock, being growth-

3. oriented, did not pay any dividends during these 4 years.
Stock price
Year Beginning End
2012 $14.36 $21.55
2013 21.55 64.78
2014 64.78 72.38
2015 72.38 91.80
a. Calculate the rate of return for each year, 2012 through 2015,
for Hi-Tech stock.
b. Assume that each year’s return is equally probable, and
calculate the average return over this time period.
c. Calculate the standard deviation of returns over the past 4
years. (Hint: Treat these data as a sample.)
d. Based on b and c, determine the coefficient of variation of
returns for the security.
e. Given the calculation in d, what should be Mike’s decision
regarding the inclusion of Hi-Tech stock in his portfolio?
P8–10 Assessing return and risk Swift Manufacturing must
choose between two asset purchases. The annual rate of return
and the related probabilities given in the following table
summarize the firm’s analysis to this point.
Project 257 Project 432
Rate of return Probability Rate of return Probability
−10% 0.01 10% 0.05
10 0.04 15 0.10
20 0.05 20 0.10
30 0.10 25 0.15
40 0.15 30 0.20
45 0.30 35 0.15
50 0.15 40 0.10
60 0.10 45 0.10
70 0.05 50 0.05
80 0.04 100 0.01
a. For each project, compute: (1) The range of possible rates of

4. return. (2) The expected return. (3) The standard deviation of
the returns. (4) The coefficient of variation of the returns.
b. Construct a bar chart of each distribution of rates of return. c.
Which project would you consider less risky? Why?
P8–13 Portfolio return and standard deviation Jamie Wong is
considering building an investment portfolio containing two
stocks, L and M. Stock L will represent 40% of the dollar value
of the portfolio, and stock M will account for the other 60%.
The expected returns over the next 6 years, 2015–2020, for
each of these stocks are shown in the following table.
Expected return
Year Stock L Stock M
2015 14% 20%
2016 14 18
2017 16 16
2018 17 14
2019 17 12
2020 19 10
a. Calculate the expected portfolio return, rp, for each of the 6
years.
b. Calculate the expected value of portfolio returns, , over the 6-
year period.
c. Calculate the standard deviation of expected portfolio
returns, , over the 6-year period.
d. How would you characterize the correlation of returns of the
two stocks L and M?
e. Discuss any benefits of diversification achieved by Jamie
through creation of the portfolio.
P8–24 Capital asset pricing model (CAPM) For each of the cases
shown in the following table, use the capital asset pricing
model to find the required return.
Case Risk-free rate, RF Market return, rm Beta,β
A 5% 8% 1.30
B 8 13 0.90

5. C 9 12 −0.20
D 10 15 1.00
E 6 10 0.60
P8–25 Beta coefficients and the capital asset pricing model
Katherine Wilson is wondering how much risk she must
undertake to generate an acceptable return on her portfolio.
The risk-free return currently is 5%. The return on the overall
stock market is 16%. Use the CAPM to calculate how high the
beta coefficient of Katherine’s portfolio would have to be to
achieve each of the following expected portfolio returns.
a. 10%
b. 15%
c. 18%
d. 20%
e. Katherine is risk averse. What is the highest return she can
expect if she is unwilling to take more than an average risk?
P8–26 Manipulating CAPM Use the basic equation for the
capital asset pricing model (CAPM) to work each of the
following problems.
a. Find the required return for an asset with a beta of 0.90 when
the risk-free rate and market return are 8% and 12%,
respectively.
b. Find the risk-free rate for a firm with a required return of
15% and a beta of 1.25 when the market return is 14%.
c. Find the market return for an asset with a required return of
16% and a beta of 1.10 when the risk-free rate is 9%.
d. Find the beta for an asset with a required return of 15%
when the risk-free rate and market return are 10% and 12.5%,
respectively.
P5–1 Using a time line The financial manager at Starbuck
Industries is considering an investment that requires an initial
outlay of $25,000 and is expected to result in cash inflows of
$3,000 at the end of year 1, $6,000 at the end of years 2 and 3,
$10,000 at the end of year 4, $8,000 at the end of year 5, and

6. $7,000 at the end of year 6.
a. Draw and label a time line depicting the cash flows
associated with Starbuck Industries’ proposed investment.
b. Use arrows to demonstrate, on the time line in part a, how
compounding to find future value can be used to measure all
cash flows at the end of year 6.
c. Use arrows to demonstrate, on the time line in part b, how
discounting to find present value can be used to measure all
cash flows at time zero.
d. Which of the approaches—future value or present value—do
financial managers rely on most often for decision making?
Why?
P5–4 Future values For each of the cases shown in the following
table, calculate the future value of the single cash flow
deposited today at the end of the deposit period if the interest
is compounded annually at the rate specified.
Case Single cash flow Interest rate Deposit period (years)
A $ 200 5% 20
B 4,500 8 7
C 10,000 9 10
D 25,000 10 12
E 37,000 11 5
F 40,000 12 9
P5–5 Time value You have $1,500 to invest today at 7% interest
compounded annually.
a. Find how much you will have accumulated in the account at
the end of (1) 3 years, (2) 6 years, and (3) 9 years.
b. Use your findings in part a to calculate the amount of interest
earned in (1) the first 3 years (years 1 to 3), (2) the second 3
years (years 4 to 6), and (3) the third 3 years (years 7 to 9).
c. Compare and contrast your findings in part b. Explain why
the amount of interest earned increases in each succeeding 3-
year period.
P5–8 Time value Misty needs to have $15,000 at the end of 5

7. years to fulfill her goal of purchasing a small sailboat. She is
willing to invest a lump sum today and leave the money
untouched for 5 years until it grows to $15,000, but she
wonders what sort of investment return she will need to earn
to reach her goal. Use your calculator or spreadsheet to figure
out the approximate annually compounded rate of return
needed in each of these cases:
a. Misty can invest $10,200 today.
b. Misty can invest $8,150 today.
c. Misty can invest $7,150 today.
P5–10 Present value calculation Without referring to the
preprogrammed function on your financial calculator, use the
basic formula for present value, along with the given
opportunity cost, r, and the number of periods, n, to calculate
the present value of $1 in each of the cases shown in the
following table.
Case Opportunity cost, r Number of periods, n
A 2% 4
B 10 2
C 5 3
D 13 2
P5–17 Cash flow investment decision Tom Alexander has an
opportunity to purchase any of the investments shown in the
following table. The purchase price, the amount of the single
cash inflow, and its year of receipt are given for each
investment. Which purchase recommendations would you
make, assuming that Tom can earn 10% on his investments?
Investment Price Single cash inflow Year of receipt
A $18,000 $30,000 5
B 600 3,000 20
C 3,500 10,000 10
D 1,000 15,000 40
P5–21 Time value: Annuities Marian Kirk wishes to select the
better of two 10-year annuities, C and D. Annuity C is an

8. ordinary annuity of $2,500 per year for 10 years. Annuity D is
an annuity due of $2,200 per year for 10 years.
a. Find the future value of both annuities at the end of year 10
assuming that Marian can earn (1) 10% annual interest and (2)
20% annual interest.
b. Use your findings in part a to indicate which annuity has the
greater future value at the end of year 10 for both the (1) 10%
and (2) 20% interest rates.
c. Find the present value of both annuities, assuming that
Marian can earn (1) 10% annual interest and (2) 20% annual
interest.
d. Use your findings in part c to indicate which annuity has the
greater present value for both (1) 10% and (2) 20% interest
rates.
e. Briefly compare, contrast, and explain any differences
between your findings using the 10% and 20% interest rates in
parts b and d.