Graded Homework

Problems

1. A saver places $1,000 in a certificate of deposit that matures after 20 years and that each year pays 4 percent interest, which is compounded annually until the certificate matures.

1. How much interest will the saver earn if the interest is left to accumulate?

2. How much interest will the saver earn if the interest is withdrawn each year?

3. Why are the answers to (a) and (b) different?

1. At the end of each year a self-employed person deposits $ 1,500 in a retirement account that earns 7 percent annually.

1. How much will be in the account when the individual gretires at the age of 65 if the contribution start when the person is 45 years old?

2. How much additional money will be in the account if the individual stops making the contribution at age 65 but defers retirement until age 70?

3. How much additional money will be in the account if the individual continues making the contribution but defers retirement until age 70?

4. Compare the answers to (b) and (c). what is the effect of continuing the contributions? How much is the difference between the two answers?

5. Graduating seniors may earn $45,000. If the annual rate of inflation is 2 percent, what must these graduates earn after 20 years to maintain their current purchasing power? If the rate of inflation rises to 4 percent, will they be maintaining their standard of living if they earn $100,000 after 20 years?

23. which is the better choice when purchasing a $30,000 car:

a) a four years loan at 6 percent,

b) an immediate rebate of $2,000 and a four-year loan at 8 percent?

3. You are given the following information concerning two stocks:

A B

Expected return 10% 14%

Standard deviation of the expected return 3.0 5.0

Correlation coefficient of the returns -.1

1. What is the expected return on a portfolio consisting of 40 percent in stock A and 60 percent in stock B?

2. What is the standard deviation of this portfolio?

3. Discuss the risk and return associated with investing (a) all your funds in stock A, (b) all your funds in stock B, and (c) 40 percent in A and 60 percent in B. (this answer must use the numerical information in your answers derived above.

   5. what is the beta of a portfolio consisting of one share of each of the following stocks, given their respective prices and beta coefficients?

   Stock price Beta

   A $10 1.4

   B $24 0.8

   C $41 1.3

D $19 1.8

How would the portfolio beta differ if (a) the investor purchase 200 shares of stocks B and C for every 100 shares of A and D and (b) equal dollar amounts were invested in each stock?