Question

a) Calculate expected return of the equity Y. (S points) b) Calculate standard deviation of the equity Y" (5 points) e) Consider a risk-free asset "X" of which the rate of return is 3%. Create a portfolio that consists of risky equity-V" and risk-free asset "X" Calculate portfolio return and standard deviation for each of following set of allocation of investment budget Draw a capital allocation line with horizontal axis showing portfolio SD and vertical axis showing portfolio return. (5 points) d) Calculate and interpret the sharp ratio. (5 points) 2. Explain how each of the following situations would affect interest rate and consequently, the equity market a) Sudden decrease of capital expenditure by the businesses (5 Points) b) Increase of household savings in the market (3 Points) c) Sudden decrease of money supply in the market (S Points) 3. Do you agr ee that a high inflation, given all else constant, is good for the equity market? Why or why not? (5 Points) 4. Why does a high standard deviation of a stock's rate of return mean that that stock is risky? Explain. (Hint: Intuitively explain how we calculate standard deviation and what does it mean) (S points) 5. Following is information of Company XYZ Bad year Nemal year Good ycar Total debt and total equity of company XYZ are $90 million and $130 million, respectively. The interest rate is 6%. a) Calculate Net income and ROE in bad, normal, and good years. (10 points) b) If interest rate increases to 10%, what will happen to ROE in a good year? (5 points)
Only need to answer second question as detailed as you can thanks

Answer 1

2)

a) A sudden decrease in the capital expenditure by the businesses will lead to fall in the demand for loanable funds. The interest rate will fall and quantity of loanable funds fall. The reduced interest rate will lead to higher share price in the equity market

b) The increase in the household savings will shift the supply of funds downward (rightward). Thus there will be a fall in the interest rate. The lower interest rate will lead to higher share price in the equity market,

c) The fall in the money supply will lead to increase in the interest rate. The higher interest rate will translate to a lower price of share in the equity market.