Portfolio Management (FINS2624)

Woodmaster uses labour (L) and capital (K) to produce furniture (Q). Woodmaster's production function is
given by
Q=(Ka+Lª)L1-a,
where L>0,K>0,Q>0.Suppose a=0.31.
(a) (0.25 points) The production function exhibits which returns to scale?

Oa. constant

Ob. increasing

Oc. decreasing

(b) (0.25 points) Suppose w and r are prices of L and K. Let c(te, r, Q) denote the cost function associated
with Woodmaster's production function. The average cost of production, ie. c(te, r, Q)/Q

Oa. is decreasing In Q

Ob. is increasing in Q

Oc. does not change with Q

Write your answers to 3 decimal places.
(c) (0.5 points) To minimise costs, Woodmaster uses labour (L) and capital (K) in equal amounts. Then it
must be the case that = 

Q2

Consider risk measures on the following 3 large cap stocks:

Stock Beta (β) Standard Deviation (σ)

Berkshire Hathaway (BRK) 0.69 23.50%

Apple (APPL) 1.15 24.00%

Microsoft (MSFT) 1.28 22.80%

The standard deviation of the Market Portfolio σM = 15.3%

a. Calculate the systematic and unsystematic risk of BRK, APPL and MSFT.

b. What is BRK's covariance and correlation with the Market Portfolio’s return?

c. Calculate the following covariances: Cov(BRK,APPL), Cov(BRK,MSFT), Cov(APPL,MSFT)

d. Consider an equally weighted portfolio of BRK and APPL. Calculate the portfolio’s total risk (i.e. variance), systematic risk and unsystematic risk? Verify that 𝜎𝜀𝑃^2 = 1/𝑁2 𝛴N𝑖=1 𝜎^2𝜀𝑖

e. Consider an equally weighted portfolio of all three stocks. Calculate the portfolio’s total risk (i.e. variance), systematic risk and unsystematic risk? Verify that 𝜎𝜀𝑃^2 = 1/𝑁2 𝛴N𝑖=1 𝜎^2𝜀𝑖

What happens to unsystematic risk as the number of assets becomes very large?

.

Meriton Co is bidding for construction of two warehouses per year for the next 3 years. This project requires an initial investment of $249,000 in machinery that will be fully depreciated to zero-book value using straight-line depreciation over the life of the project. The machinery can be sold at the end of the project for $115,000. The project also
requires $18,000 in net working capital for the duration of the project. The variable cost per warehouse will be $148,000 and the fixed costs will be $37,000 a year. The required rate of return is 14 percent and the tax rate is 21 percent. What is the minimal amount the firm should bid per warehouse? (Round your answer to the nearest $100)
:30:46    Multiple Choice    

$214.100

$208,200

$214,300

$212,500

The Creamery is analyzing a project with expected sales of 5,700 units, ±5 percent. The expected variable cost per unit is $168 and the expected fixed costs are $424,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $156,000. The sales price is estimated at $339 per unit, ±5 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis with fixed costs of $425,000. What is the OCF given this analysis?

Multiple Choice

$394,874

$467,023

$421,300

$416,511

$385,350

Consider the following bonds:
•
Bond A: A 2-year zero-coupon bond with a face value of $100 and 6% YTM.
•
Bond B: A 2-year par-value bond with a face value of $100 and 6% coupon.
•
Bond C: A 2-year par-value bond with a face value of $100 and 7% coupon.
•
Bond D: A 3-year par-value bond with a face value of $100 and 7% coupon.
•
Bond E: A 4-year par-value bond with a face value of $100 and 7% coupon.
•
Bond F: A 4-year discount bond with a face value of $100 and 7% coupon.
If the yield curve shifts upwards by one percent,
a.
Which bond among bonds A, B and C will experience the largest percentage price change? Which will have the lowest percentage price change?
b.
Which bond of bonds C and D will experience a larger percentage price change?
c.
Would you expect the difference in percentage price change to be bigger between bonds C and D or between bonds D and E?
d.
Which bond of bonds E and F will experience a larger percentage price change?