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Running Head: Finance Assignment

This finance assignment document discusses several topics: 1) It chooses factor X for a capital asset pricing model, which relates anticipated asset returns to market risk and risk-free rates. 2) It calculates stock returns for three companies in 1980, with results ranging from -21.11% to 54.4%. 3) It determines an example person's average (13.37%) and marginal (18%) tax rates based on provided income and tax data for 2016-2017. 4) It calculates a 2.04% holding period return for an asset based on original value, current value, and dividends earned. 5) It discusses how standard deviation is used to measure investment risk

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43 views

Running Head: Finance Assignment

This finance assignment document discusses several topics: 1) It chooses factor X for a capital asset pricing model, which relates anticipated asset returns to market risk and risk-free rates. 2) It calculates stock returns for three companies in 1980, with results ranging from -21.11% to 54.4%. 3) It determines an example person's average (13.37%) and marginal (18%) tax rates based on provided income and tax data for 2016-2017. 4) It calculates a 2.04% holding period return for an asset based on original value, current value, and dividends earned. 5) It discusses how standard deviation is used to measure investment risk

Uploaded by

Kashém
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Running Head: FINANCE ASSIGNMENT

Finance Assignment

Name.

Institution.

Date.
FINANCE ASSIGNMENT 2

1. I would choose factor X. using Beta, which is an equity market indicator is also used in

the capital asset pricing model, which measures an asset's potential return on projected

market returns using beta and risk-free prices (Chuliá, et.al, 2017, p.19). The pricing

model of capital assets is a model that defines the relationship between systemic risk and

anticipated return for an asset which shall be used in this factor. The risk-return

relationship is a crucial aspect of portfolio management, which is often mistaken, with

many claiming this relationship is linear (Damodaran, 2018). This can be seen in the

PRISM item, where we use a conventional balanced portfolio as the core master

investment plan, and spread the return on the basis of an improved risk return partnership,

which is greater than one would traditionally get in the market.

2. The return on index for the year 1980 is calculated as;

ending price−starting price


return=
Starting price

For Spacely space Sprockets,

1,200,000,000−850,000,000
r=
850,000,000

¿ 0.41176∗100

¿ 41.18 %

For Cogswell Cogs;

71,000,000−90,000,000
r=
90,000,000

−0.21111∗100

¿−21.11%

For Slate Rock and Gravel;


FINANCE ASSIGNMENT 3

772,000,000−500,000,000
r=
500,000,000

¿ 0.544∗100

¿ 54.4 %

3. A) Based only on the information provided, what is this person’s average tax rate?

2016;

tax paid
Average tax rate= ∗100
Taxable income

25,800
¿
198,000

¿ 0.1303

2017;

31,470
¿
229,500

¿ 0.13712

Average for the two:

0.1303+0.1371
¿
2

¿ 0.1337∗100

13.37 %

B) Based only on the information provided, what is this person’s marginal tax

rate?

Change∈tax
Maginal tax rate=
Change∈taxable income

31,470−25,800
¿
229,500−198,000
FINANCE ASSIGNMENT 4

5,670
¿
31,500

¿ 0.18∗100

Marginal rate is at 18 % .

4. A) to calculate the holding period returns,

current value−original value


¿ +dividend earned
original value

53−51
¿
53

¿ 0.03774+ 2

The holding period returnsis $ 2.04

B) The misunderstood idea that the internal return rate and the net present value contain

persistent assumptions about reinvestment rates and business activity. The reality is, there

really are no reinvestment rate assumptions built into, or related to, either the IRR or

NPV calculation and use. Cash funds thrown out by capital investments do not need to be

reinvested and may be allocated to lenders, creditors or preserved for future spending

with no negative impact either on the IRR or NPV (Magni, Carlo, and John D., 2017).

5. Standard deviations are used as market volatility measures hence it is a variable used to

measure risk. The greater the standard deviation, the more risky the investment is. Stock

A tends to have a higher standard deviation of 25%, than stock B, yet has a lower

expected return rate. This scenario hence violates the traditional assumptions for risk and

return. Damodaran, (2018) suggests that an investment with a high standard deviation is
FINANCE ASSIGNMENT 5

assumed to generate more risk hence forth higher returns than that with a low standard

deviation.

References

Chuliá, Helena, Montserrat Guillén, and Jorge M. Uribe. "Measuring uncertainty in the stock

market." International Review of Economics & Finance 48 (2017): 18-33.

Damodaran, Aswath. "The Investment Principle: Risk and Return Models." NYU Stern School

of Business (2018).

Magni, Carlo Alberto, and John D. Martin. "The Reinvestment Rate Assumption Fallacy for IRR

and NPV." Available at SSRN 3090678 (2017).

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