The following table shows estimates of the risk of two wellk

The following table shows estimates of the risk of two well-known Canadian Stocks:

Standard

Deviation, %

Standard

Error of Beta

What proportion of each stock\'s risk was market risk, and what proportion was specific risk?

What is the variance of Toronto Dominion? What is the specific variance?

What is the confidence interval on Research in Motion\'s beta?

If the CAPM is correct, what is the expected return on Toronto Dominion? Assume a risk-free interest rate of 5% and an expected market return of 12%.

Given the projections in the above, in one- to –two pages, calculate the NPV and interpret your results.

In one –to –two pages, construct a sensitivity and a scenario analysis of the project and explain what these analyses reveal about the project\'s risks and potential value to the firm.

Solution

a)

proportional of market risk for Dominion = 66%

proportion of specific risk for dominion = 34%

proportional of market risk for motion = 8%

proportion of specific risk for motion = 92%

b)

variance of Dominion = 25%^2 = 625

specific variance = 625 * 34% = 212.5

c)
t-statistic for motion = 0.82/0.25 = 3.28

this is significance a 1% level , so confidence level is 99%

d)

expected return = rf + beta * (rm-rf)

expected return of dominion

= 5% + 1.26 * (12% -5%) = 13.82%