Fin 3322

Primer Homework
1.

What is the difference between sensitivity analysis and scenario analysis?

Sensitivity analysis only allows one assumption to change at a time; scenario
analysis allows all the variables/assumptions to move simultaneously,
allowing for more realism.

2.

Whitby Sports is considering an investment in a tennis ball machine. The machine

costs $800 million, and has a life expectance of 8 years. The cost of capital is
12%, what is Whitby Sports break even operating cash flow?
N
I/Y
PV
PMT
FV

=8
= 12
= 800,000000
=?
=0

PMT = 161,042,273.1
3.

Rank the following in terms of historical risk, and historical return from highest to
lowest:, U.S. Treasury bills, Long-term Corp bonds, Large Cap Stocks, Long-term
Gov Bonds, Small Cap Stocks
Small Cap Stocks, Large Cap Stocks, Long-term Corp bonds, Long-term
Gov Bonds, U.S. Treasury bills

4.

A stock had returns of 8%, -2%, 4%, and 16% over the past four years. What is
the expected return, the variance, and the standard deviation of this stock for the
past four years?
Expected Return = 0.25*0.08 + 0.25*-0.02 + 0.25*0.04 + 0.25*0.16 = 0.065
Var = 0.25*(0.08 - 0.065)2 + 0.25*(-0.02 - 0.065)2 + 0.25*(0.04 - 0.065)2 +
0.25*(0.16 - 0.065)2= 0.004275
Std Dev = 0.06538

5.

You are comparing stock A to stock B. Given the following information, which
one of these two stocks should you prefer and why?
State of
Probability that
Rate of Return if
Economy
State Occurs
State Occurs
Stock A
Stock B
Boom
60%
9%
15%
Recession
40%
4%
-6%
Expected Return (A) = 0.6*0.09 + 0.4*0.04 = 0.07
Var (A) = 0. 6*(0.09 - 0.065)2 + 0. 4*(0.04 - 0.065)2 = 0.0006
Std Dev (A) = 0.024495
Expected Return (B) = 0.6*0.15 + 0.4*-0.06 = 0.066
Var (B) = 0. 6*(0.15 - 0.066)2 + 0. 4*(-0.06 - 0.066)2 = 0.010584
Std Dev (B) = 0.10288
Choose Stock A, higher expected return with lower risk