Businesses have to make many financial decisions that have a direct impact on operations and the ability to successfully compete in the marketplace. Base your writing on the information from the course coupled with information located in the Strayer databases or Internet.

Write a two to three (2-3) page paper in which you:

1. Assume that you are financial advisor to a business. Describe the advice that you would give to the client for raising business capital using both debt and equity options in today’s economy. Outline the major advantages and disadvantages of each option.
2. Summarize the advice that you would give the client on selecting an investment banker to assist the business in raising this capital.
3. Explain the historical relationships between risk and return for common stocks versus corporate bonds. Explain the manner in which diversification helps in risk reduction in a portfolio. Support response with actual data and concepts learned in this course.
4. Use at least one (1) quality references. Note: Wikipedia and other Websites do not quality as academic resources. However, you may use data sources, such as Yahoo Finance.

Your assignment must follow these formatting requirements:

• Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
• Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

• Describe the characteristics and valuation of stocks and bonds, and how each is a key component in the financing of corporations.
• Describe the key elements of the securities markets, and how the markets drive financial transactions, decision making, and risk analysis.
• Use technology and information resources to research issues in finance.
• Write clearly and concisely about finance using proper writing mechanics.

Homework 3
Question 1 The Betas of four stocks in a perfect capital market are as follows:
??A = -1 ??B = 0 ??C = 1 ??D = 2
Assume that the market is in equilibrium, that the returns on the risk-free asset is 6% and
that the expected return on the “market portfolio” is 14%. Calculate the expected returns
on shares A, B, C and D.
Question 2 Assume a perfect capital market in which investors are constrained to holding
portfolios that consist only of a single risky asset, that borrowing or lending at a riskless
interest rate is possible, and that in equilibrium the following relationship between two
risky securities i and j holds:
Security i Security j
Exp. ret. (%) 26 18
Standard Dev. (%) 15 9
(a) What is the riskless rate of interest in this market? (Hint: in equilibrium under the
above conditions both securities must lie on the same market line).
(b) If the investor wishes to hold a portfolio with a standard deviation of only 6%, what
should be his investment strategy?
(c) What would his investment strategy be if he wanted to reach an expected return of
24%?
Question 3 Assume a perfect capital market in which investors are constrained to holding
portfolios that consist of a single risky asset and the riskless asset. In equilibrium the
following relationship between two risky securities i and j holds:
Security i Security j
Exp. ret. (%) 18 25
Standard Dev. (%) 8 12
(a) What is the rate of interest in this market?
(b) Assume that the investor is confronted with two mutually exclusive alternatives:
A portfolio of $900 worth of stock i:
A portfolio of $600 worth of stock j plus $300 worth of the riskless asset.
Which of the two alternatives is preferable?
Question 4 There are three stocks in the market and the CAPM holds. The parameters of
the stocks are as follows:
A B C
ri 15% 20% 30%
??I 1/2 1 ?
What should be ??3 such that the CAPM holds? What is the mean rate of return on the
market portfolio? What is the risk-free interest rate?
Question 5 The following describes the mean return and betas of DuPont, Dow
Chemical and Union Carbide:
DuPont DowChemical UnionCarbide
ri 4.6% 10% 30%
??I .86 .74 .71
Determine the arbitrage portfolio with zero investment and a zero beta. Is there room for
arbitrage profit?