1) If a firm borrows £20 million for one year at an interest rate of 4%, approximately what is
the present value of the interest tax shield? Assume a 20% marginal corporate tax rate.
2) What is the standard deviation of the portfolio that consists of A and B shares?
Firm Expected Return Standard Deviation Percentage of portfolio Correlation
A 20% 40% 60% 0.2
B 10% 20% 40% 0.2
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