Question: 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.