North Central

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Date Submitted: 11/26/2012 09:27 AM

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Question 1

a. A wide spread between high and low returns can suggest that there is higher standard deviation and hence company may be relatively risky, but it is also important to look at the beta of the company. Beta is the measure of a stock’s volatility as compared to the market, and higher beta stocks are more risky. b. Gold. During a recession, money will flow from the bond market to the stocks market, and as the regulator compensates NCU for its cost of capital, the returns would be most similar to Gold. Food. With competition, the company returns will move along with the state of the economy and the food stock reflects that of a necessity which moves with the economy i.e. people use less electricity in a recession. c. With a higher dividend payout rate, the company might be perceived by investors as less risky as these stocks are typically those of well-established companies. d. According to table 1, it has a beta of 0, hence it is independent of state of economy. T-bills are not completely risk free as they still entail interest rate risk and inflation risk. e. This is due to interest rate changes. When returns on stocks are lower, bonds become more attractive. Hence, investors would switch investments to bonds, pushing the prices up, and hence increasing the capital gain for bondholders. Corporate bonds issued by NCU have higher returns than T-bonds as they compensate for default risk. And NCU’s bond rating would not change the fact that its returns are higher than bonds. f. So when there a recession and the dollar fall, the value of gold goes up as Gold is regarded as a safe haven, and investors transfer their money to an alternative investment (Gold), driving the prices up. Computers are not necessities and thus when the economy is doing well and people have more money to spend, they can afford to buy newer technological goods.

Question 2 Expected Return = (-24% x 0.1) + (6% x 0.2) + (17% x 0.4) + (33% x 0.2) + (48% x 0.1) = 17% Question 3 a....