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** Please first look at the file “FIN45 VENTURE CAPITAL” to see if you are profe
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** Please first look at the file “FIN45 VENTURE CAPITAL”
to see if you are professional on these calculations**
Here below, is the clarification of that file:
Clarification, the assignment – short version:
Invest 100 billion USD for 20 years, you must earn 7% p.a. Should be possible as I showed in class S&P 500 Index got an average historical growth of 10.5%. Use 10.5%
As the market required return. Use the T-Bond rate as the risk-free rate. Why not the 10 year Bond. Rounding to 3% is perfectly acceptable.
The Standard Deviation of S&P 500 is about 15%
. You can find your own sources also. Beta for the market is 1 by definition. S&P 500 is our proxy for the market. Beta measures volatility compared to the market.
CAPM Re=Rf+B(Rm-Rf) where Re is the required return for an individual stock, Rf the Risk-Free Rate, and B is the Beta. The Beta you can look up on Yahoo Finance.
You want to create an optimal portfolio replicating the market. S&P 500 is our proxy for the market.
An example, Tesla (https://finance.yahoo.com/quote/TSLA/) got a Beta of 2.12 hence the required return for Tesla is Re(tesla)=3%+2.12(10.5%-3$)=18.9% while for Coca-Cola (https://finance.yahoo.com/quote/KO) it is, Re(Coca-Cola)=3%+0.58(10.5%-3%)=7.35%.
Market Segmentation – Long and short interest rates are not related. The market is segmented since long and short rates are not perfect substitutes. You have a 20-year perspective. Possibly 20-year bonds make sense? Or not? If rates go up, bond prices go down.
You can invest in stocks and bonds; you are expected to earn the weighted average of the expected return of the assets in the portfolio. Try to earn 7% without taking excessive risk.
Do not forget dividends, some stocks pay a lot! https://money.usnews.com/investing/stock-market-news/articles/dividend-stocks-aristocrats
More on Markowitz:
PE or Price Earnings Ratio. High PE-Ratios imply high growth. What is the stock’s PE and the portfolios?
Lastly the underperformance 5 years at 3% meaning you must make up for it! ((1.03^5)*(1+x)^15)=1.07^20 solve for x and x is about 8.4%. Discuss the risk and implications.
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