Assignment Coverage Summary
1. Descriptive statistics and correlation
2. Time value of money; Risk return and capital asset pricing model
3. Multivariate regression
4. Inference problems - heteroskedasticity and autocorrelation, multicollinearity
5. Modeling volatility and correlation
6. Univariate time series analysis
7. Simultaneous equation models
ASSIGNMENT I
SUBMISSION DATE: DECEMBER 3, 2023
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Descriptive statistics and correlation
Time value of money: Risk return and capital asset pricing
model
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1. The following grouped data (frequency distribution) relates to selling prices of
cars and their frequencies. Determine the arithmetic mean car selling price.
Table 1: Frequency distribution of selling prices of cars
Price (TZS) fi Midpoint, mi f i mi
12 up to 15 8 13.5 108
15 up to 18 23 16.5 379.5
18 up to 21 17 19.5 331.5
21 up to 24 18 22.5 405
24 up to 27 8 25.5 204
27 up to 30 4 28.5 114
30 up to 33 1 31.5 31.5
n n
n f i 79 f X i i 1573.5
i
1 i
1
2. Suppose coffee shop customers were randomly surveyed and asked to select a
category that described the cost of their recent purchase. The results were as
follows:
2
Table 2: Survey Results
Cost (US$) 0-2 2-4 4-6 6-8 8 -10
Number of Customers 2 3 6 5 3
Find the sample mean and standard deviation of these costs.
3. A person has invested TZS 45,000,000 in the stock market. At the end of the
first year the amount has grown to TZS 6,250,000, he has had a 25 percent
profit. If at the end of the second year, his principal has grown to TZS 8,750, 000
the rate of increase is 40 percent for the year. What is the average rate of
increase of his investment during the two years?
4. Discussion the relationship between mean, median and mode
5. Consider the following Table
Table 3: Frequency distribution
Gas Consumption Frequency
10 – 19 1
20 – 29 0
30 – 39 1
40 – 49 4
50 – 59 7
60 – 69 16
70 – 79 19
80 – 89 20
90 – 99 17
100 – 109 11
110 – 119 3
120 – 129 1
100
Compute and interpret
(a) Median
(b) Mode
(c) Standard deviation
3
6. Find the coefficient of skewness from the data given in Table below:
Table 4: Frequency Distribution
Size 30 40 50 60 70 80 80 100
Frequency 7 10 12 32 102 135 43 8
7. Calculate and interpret the Karl Pearson’s coefficient of skewness for the
following data.
Table 5: Frequency distribution and deviations
Variable 0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40
No. of workers 2 5 7 13 21 16 9 4
8. Discuss the properties of Pearson’s coefficient of correlation
Compute and interpret the Pearson correlation coefficient between sales (in
thousand TZS) and expenses (in thousand TZS) of the 10 firms as reported in
Table 6.
Table 6: Sales (X) and Expenses (Y) (in thousands TZS)
Firm X Y
1 50 11
2 50 13
3 55 14
4 60 16
5 65 16
6 65 15
7 65 15
8 60 14
9 60 13
10 50 13
X i 580 Yi 140
9. Suppose that a coefficient of correlation of 0.90 and a sample of pairs of 10
items. Compute the probable error.
4
10. A debt of TZS 30,000,000 which is due six years from now is instead to be paid
off by three payments: TZS 5,000,000 now, TZS 15,000,000 in three years, and
a final payment at the end of five years. What should this payment be if an
interest rate of 7% compounded annually is assumed?
11. A client seeking liquidity sets aside TZS300,000 in a bank account today. The
account pays 6 percent compounded monthly. Because the client is concerned
about the fact that deposit insurance covers the account for only up to
TZS1000,000, calculate how many months it will take to reach that amount.
12. Best food Company is planning to spend TZS100 million on advertising. The
company expects this expenditure to result in annual incremental cash flows of
TZS16 million in perpetuity. The corporate opportunity cost of capital for this type
of project is 13 percent.
(a) Calculate the NPV for the planned advertising.
(b) Calculate the internal rate of return.
(c) Should the company go forward with the planned advertising? Explain.
13. IAA is planning to establish a new Campus overseas. The project requires an
initial investment of TZS150 million. Management intends to run this Campus for
six years and then sell it to a local Institution. IAA’s finance department has
estimated the following yearly cash flows:
Table 7: Cash flow
Year Cash flow (TZS)
0 -150,000,000
1 40,000,000
2 40,000,000
3 40,000,000
4 40,000,000
5 40,000,000
6 70,000,000
IAA decides that the Campus cost of capital of 19 percent is an appropriate hurdle
rate for this project.
(a) Calculate the internal rate of return of this project
5
(b) Make a recommendation to the IAA Management concerning whether to
undertake the project
14. You have a portfolio of two mutual funds, A and B, 75 percent invested in A, as
shown in Table 8.
Table 8. Mutual fund expected returns, return variances, and covariances
Fund A B
E (RA) = 19% E (RB) =13%
Covariance Matrix
Fund A B
A 625 120
B 120 196
(a) Calculate the expected return of the portfolio.
(b) Calculate the correlation matrix for this problem
(c) Compute portfolio standard deviation of return
15. You are thinking about investing your money in the stock market. You have the
following two stocks in mind: stock A and stock B. You know that the economy
can either go in recession or it will boom. Being an optimistic investor, you
believe the likelihood of observing an economic boom is two times as high as
observing an economic depression. You also know the following about your two
stocks:
State of the Economy Probability RA RB
Boom 0.75 10% –2.5%
Recession 0.25 6% 40%
(a) Calculate the expected return for stock A and stock B
(b) Calculate the total risk (variance and standard deviation) for stock A and for
stock B
(c) Calculate the expected return on a portfolio consisting of equal proportions
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in both stocks.
(d) Calculate the expected return on a portfolio consisting of 10% invested in
stock A and the remainder in stock B.
(e) Calculate the covariance between stock A and stock B.
(f) Calculate the correlation coefficient between stock A and stock B.
(g) Calculate the variance of the portfolio with equal proportions in both stocks
using the covariance from answer e.
(h) Calculate the variance of the portfolio with equal proportions in both stocks
using the portfolio returns and expected portfolio returns from answer c.
16. ABC International Inc. is considering the following project. They want to
introduce a new line of pastries and desserts. The sales for this division are
expected to be $500,000 per year for each of the next 3 years. For this
expansion you are able to use some of your existing machines that are currently
not being used. Four years ago you paid $250,000 for these machines and the
current market value of the machines is $110,000. You have been using a 5-
year straight-line full depreciation on these machines. There is no need to buy
any additional equipment. Variable costs for the division are projected at 65% of
sales. Fixed costs are 100,000 per year. Total net working capital requirements
are $75,000 at the start, $100,000 in year 1, and $50,000 in year 2. Net working
capital will be recovered at the end of three years. The tax rate is 36%.
(a) What is the cash flow from assets for this project in each year?.
(b) What is the NPV of this project if the discount rate is 12%?.
(c) If ABC International Inc. is expected to pay a dividend of $2.45 next time,
and the dividends are expected to grow at 5% forever, what is the cost of
equity (or required rate of return on equity) for ABC International Inc. if the
current stock price is $30.
(d) Assuming the dividend-growth model you used in part c. is correct, and
the return on the market portfolio is 12% and the risk-free rate of return is
2%, what must be the beta of this project? (Hint: use the CAPM or SML).
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17. Consider the following information about two stocks where the
probability of an economic boom is 40%:
Economic State Return A (RA) Return B (RB)
Boom 40% 6%
Recession –2% 12%
(a) Calculate the expected return for stock A and stock B.
(b) Calculate the standard deviation of stock A and stock B.
(c) Calculate the correlation between stock A and stock B.
(d) Calculate the total risk (standard deviation) of a portfolio, where 1/4 of your
money is invested in stock A, and 3/4 of your money is invested in stock B.
(e) Calculate the expected return on a portfolio with equal proportions in the risky
assets, and 25% in a risk-free asset.
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End of assignment 1
Plagiarism is an ethical issue, it may lead to a mark of zero. Ensure that your work is
beyond reproach.
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