Please show formulas and calculations and not just results and numbers, and explain rationale for answers. Whenever applicable, interest is compounded annually and payments occur at the end of the period. Face value for bonds is $1000.
You have the following information for Dell Inc.: 5%, 15%, -10%, 25%.
a. Calculate the average return and standard deviation for a population for Dell Inc.
b. The S&P 500 market portfolio has a standard deviation of 20%. Dell Inc. has a beta of .57. Find the correlation between Dell and the S&P 500. HINT: The formula for beta can help you get the correlation.
c. The S&P market portfolio has a return of 15%. Ten-year T-bonds (risk-free asset) have a return of 2.5%. Use Dell’s beta of .57 to estimate the required return for the stock.
d. If you put $120,000 into Dell and $40,000 into the S&P 500, find the return and standard deviation of your portfolio.
e. Based on additional research, you estimate the expected return on Dell’s stock at 16%. If the market is efficient, what will happen to the price of Dell? Explain.
f. Dell announces a new project. The new project has a beta of 1.5 and an expected return (IRR) of 20%. Is the project a good idea? Explain.