Finc 340: 1. The PowerBall Lottery Last week’s reading included a section on the time value of money

Finc 340:

1. The PowerBall Lottery

Last week’s reading included a section on the time value of money.

How would you advise a friend if they won the $400,000,000 PowerBall Lottery, and had the choice of equal payments for 30 years, or a $224M lump sum payment up front?

For this problem let’s assume an inflation rate of 3% and that taxes have no impact since the winner will pay the maximum rate each year in either case.

2. Does it make sense to own a stock if it does not outperform the S&P500 index?  Why or why not?

3. What is the difference between diversifiable risk and undiversifiable risk?  (in your own words only)

4. What % of managed mutual fund portfolios have outperformed the S&P500 index over the past 5 years?   Is this what you expected?

5. What is the risk premium of Tesla stock (TSLA) if the beta is 1.28 and the market return (based on the last 12 months of the S&P500 index) is 20%.  Please calculate then explain this to a non-finance person.

 

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