Baran

AIM 5: Explain how additional CFAR costs impact the capital budgeting decision.

 

1、Raymor Corporation has an expected cash flow of $150 million with volatility of $50 million. It is considering a project that costs $50 million and has a volatility of $20 million. The cash flow of the new project has a correlation of 0.70 with the cash flow of existing projects. The impact of the new project on cash flow at risk (CAR), calculated at the 95 percent confidence level, is closest to:

A) $30.52 million.
 
B) $36.28 million.
 
C) $98.37 million.
 
D) $25.69 million. 

Baran

The correct answer is D

The new cash flow volatility is [Var(CE)+Var(CN)+2Cov(CE,CN)]1/2 = [502+202+2(.7)(50)(20)]1/2 =65.57. ΔCAR = ΔVolatility x 1.65 = 1.65 x (65.57 –50) =25.69.

Baran

AIM 6: Describe the process of CFAR and VAR allocations to the existing activities of the firm.

 

1、If the standard deviation of the market’s returns is 5.8%, the standard deviation of a stock’s returns is 8.2%, and the covariance of the market’s returns with the stock’s returns is 0.003, what is the beta of the stock?

A) 1.07.
 
B) 0.89.
 
C) 0.05.
 
D) 1.12.

Baran

 The correct answer is B

The formula for beta is: (Covstock,market)/(Varmarket), or (0.003)/(0.058)2 = 0.89.

Baran

AIM 9: Explain the limitations on project selection and the use of derivative instruments as ways to decrease VAR/CFAR.

1、Limitations on the use of derivatives to reduce risk include all of the following EXCEPT:

A) commissions on derivative trades.
 
B) costs of customization.
 
C) credit risk premiums in derivative prices. 
 
D) problems of moral hazard.

Baran

The correct answer is A

Commissions on listed derivatives are quite small compared to the other costs listed.

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嘿嘿，谢谢[em23]