Question

Question 5 4 What is the present value of a five-period annuity of $4,000 if the interest rate per period is 12% and the first payment is made today? $8,074.70 $7.209.55 $12.112.05 $16,149.40 $14,419.10 Question 6 6 A portfolio is comprised of 60% of Stock A and 40% of Stock B. What is the expected return of the portfolio? Return on stock B Scenario Recession Probability 5% Return on stock A -32% 4% Normal 80% 14% 8% Boom 15% 28% 11% O 7.68% 11.58% 7.7% 9.64%

Answer 1

5) Calculation of present value of cashflows::
Statement showing Cash flows
Particulars	Time	PVf 12%	Amount	PV
Cash Flows	-	1.0000	4,000.00	4,000.00
Cash Flows	1.00	0.8929	4,000.00	3,571.43
Cash Flows	2.00	0.7972	4,000.00	3,188.78
Cash Flows	3.00	0.7118	4,000.00	2,847.12
Cash Flows	4.00	0.6355	4,000.00	2,542.07
PV of Cash Flows				16,149
So correct answer is $16149.40
6) Calculation of expected return of portfolio:
Expected return of A:
State	Probability(a)	Return(%) (b)	(a)*(b)
Recession	0.05	-32	-1.60
Normal	0.8	14	11.20
Boom	0.15	28	4.20
	Expected return		13.80
Expected return of A is 13.80%
Expected return of B:
State	Probability(a)	Return(%) (b)	(a)*(b)
Recession	0.05	4	0.20
Normal	0.8	8	6.40
Boom	0.15	11	1.65
	Expected return		8.25
Expected return of B is 8.25%
Stock	Probability(a)	Return(%) (b)	(a)*(b)
A	0.6	13.8	8.28
B	0.4	8.25	3.30
	Expected return		11.58
So correct answer is 11.58%