1. If you were picking stocks, would want safer stocks that pay dividends (risk averse)? Or riskier stocks that have the potential for growth and higher return (or that might fall in value)? Explain why you would want a 'risk averse portfolio' or a 'return seeking portfolio'?
2. Assuming no transaction costs, suppose £1= $1.9809 in New York, DM 1 = $0.6251 in Frankfurt, £1 = DM 3.1650 in London. Is there an arbitrage opportunity? Why?
3. A compay is expected to have earnings of $1.39 per share in one year, $1.83 per share in two years, and $2.36 per share in three years. The dividend payout ratio is also expected to remain at 30% over the next three years. The leading P/E ratio is expected to increase up to 20 in two years. If the required rate of return is 10%, what is a fair value for this stock today?