Question

Assignment 1 1. For each of the investments shown in the following table, calculate the rate of return earned over the specified time period. - Investment Cash Flow during the Period $15,000 $80 $7,000 Beginning Value $120,000 $600 $45,000 Ending Value $118,000 $500 - $48,000 2. Assume that the risk-free rate is currently 9% and the market return is currently 13%. Calculate the required return for an asset with the following beta: Beta Required Returns Investment Asset A Asset B Asset C Asset D 1.0 - 1.5 2.0

Answer 1

Compute the rate of return on investment A using the equation as shown below:

Rate of return = (Cash flow during period + Ending value – Beginning Value) / Beginning value

                       = ($15,000 + $118,000 - $120,000) / $120,000

                       = 10.83333333%

Hence, the rate of return earned is 10.83333333%

Compute the rate of return on investment B using the equation as shown below:

Rate of return = (Cash flow during period + Ending value – Beginning Value) / Beginning value

                       = ($80 + $500 - $600) / $600

                       = -3.333333333%

Hence, the rate of return earned is -3.333333333%.

Compute the rate of return on investment C using the equation as shown below:

Rate of return = (Cash flow during period + Ending value – Beginning Value) / Beginning value

                       = ($7,000 + $48,000 - $45,000) / $45,000

                       = 22.22222222%

Hence, the rate of return earned is 22.22222222%.