You are responsible for managing a portfolio of two investments for the coming year. You have...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are responsible for managing a portfolio of two investments for the coming year. You have read all of the latest financial news and according to your favourite reputable financial analysts, the probability of another recession occurring is 40% and the probability of a booming economy is 20%; otherwise the economy will be behaving normally. Common shares of Firm A are expected to earn a return of 30% during boom times, but lose 12% during a recession. Normally, the firm's common shares would earn a 20% return. The price of Firm B's common shares is expected to decline 15% during boom times, but increase by 5% during a recession. Normally the firm's common shares would earn a 10% return. a. Calculate the expected return on the common shares of Firm A. b. Calculate the expected return on the common shares of Firm B. c. Calculate the expected return of a portfolio 40% invested in shares of Firm A and the remainder in shares of Firm B. d. Calculate the standard deviation of expected returns for Firm A? e. Calculate the standard deviation of expected returns for Firm B? f. Calculate the standard deviation of expected returns for a portfolio 40% invested in shares of Firm A and the remainder in shares of Firm B? g. Compare the return versus risk of a 100% investment in Firm B's shares with the return versus risk of the portfolio consisting of 40% invested in Firm A and 60% in Firm B. Which would you prefer, 100% invested in Firm B's shares or the portfolio consisting of 40% invested in Firm A and 60% in Firm B? Why? You are responsible for managing a portfolio of two investments for the coming year. You have read all of the latest financial news and according to your favourite reputable financial analysts, the probability of another recession occurring is 40% and the probability of a booming economy is 20%; otherwise the economy will be behaving normally. Common shares of Firm A are expected to earn a return of 30% during boom times, but lose 12% during a recession. Normally, the firm's common shares would earn a 20% return. The price of Firm B's common shares is expected to decline 15% during boom times, but increase by 5% during a recession. Normally the firm's common shares would earn a 10% return. a. Calculate the expected return on the common shares of Firm A. b. Calculate the expected return on the common shares of Firm B. c. Calculate the expected return of a portfolio 40% invested in shares of Firm A and the remainder in shares of Firm B. d. Calculate the standard deviation of expected returns for Firm A? e. Calculate the standard deviation of expected returns for Firm B? f. Calculate the standard deviation of expected returns for a portfolio 40% invested in shares of Firm A and the remainder in shares of Firm B? g. Compare the return versus risk of a 100% investment in Firm B's shares with the return versus risk of the portfolio consisting of 40% invested in Firm A and 60% in Firm B. Which would you prefer, 100% invested in Firm B's shares or the portfolio consisting of 40% invested in Firm A and 60% in Firm B? Why?
Expert Answer:
Answer rating: 100% (QA)
SOLUTION a The expected return on the common shares of Firm A can be calculated as follows Expected Return Probability of Boom Return during Boom Probability of Recession Return during Recession Proba... View the full answer
Related Book For
Managing Operations Across the Supply Chain
ISBN: 978-0078024030
2nd edition
Authors: Morgan Swink, Steven Melnyk, Bixby Cooper, Janet Hartley
Posted Date:
Students also viewed these finance questions
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Fill the blanks of the following table (last column) and find out the value of SDR in terms of U.S. dollars ($/SDR) and the value of U.S. dollars in terms of SDR (SDR/$) The exchange rate is...
-
Several flow graphs are shown in Figure. Determine the transpose of each flow graph, and verify that in each case the original and transposed flow graphs have the same systemfunction. x(n] y[n] (a)...
-
Juno, a US Company, has a 100% owned subsidiary in Japan. The functional currency for the subsidiary is the Japanese yen. The Japanese subsidiary purchases merchandise on credit from a Swiss company,...
-
The equation of motion of a simple pendulum, subjected to external force, is given by \[\ddot{\theta}+0.5 \dot{\theta}+\sin \theta=0.8\] Find the nature of singularity at \(\theta=\sin ^{-1}(0.8)\).
-
Balanced scorecard. Lee Corporation manufactures various types of color laser printers in a highly automated facility with high fixed costs. The market for laser printers is competitive. The various...
-
Describe the function and origins of Clinical Laboratory Improvement Amendments (CLIA). Also, discuss the benefits of being a CLIA-waived facility. Provide and describe an example of a typical...
-
For this assignment you will draw a Venn Diagram with three circles, one for each of the creation myths of this section- Out of the Blue, Genesis, and Popul Vu. You should compare and contrast them...
-
Because each industry typically has a different method for recognizing income, revenue recognition is one of the most difficult tasks for accountants, as it involves a number of ethical dilemmas...
-
You are the manager of both John and Martha. John has a resentment toward Martha. John has been monitoring Martha's every move for about 3 months, but you just found out about it last week. John...
-
Write a UML diagram for a Cat class. Your cat has 3 attributes: name (i.e. Tobey) which is a String breed which is the type of cat it is (i. e. Himalayan Sealpoint), also a String gender which is a...
-
Which expression below properly illustrates the syntax required to check if the variable saleAmount contains a value greater than 1000 but less than 5000? Group of answer choices saleAmount > 1000 ||...
-
create a Queue. (alternately you can create a list and simply implement enqueue and dequeue functions in the List - that will technically make it a queue). You will fill the first list with numbers...
-
Instruction Create a native application for Android that allows the user to store and manage tasks. Your application should allow user to create tasks by category that user chooses (work, school,...
-
Describe the history of GE's insurance business in one full page. Use at least two reliable sources with proper citations to them using the APA style of citation. 1. Explain in a full page three...
-
The May 2014 revenue and cost information for Houston Outfitters, Inc. follow: Sales Revenue (at standard).............. $ 540,000 Cost of Goods Sold (at standard) ..........341,000 Direct Materials...
-
Michigan State Figurine Inc. (MSF) sells crystal figurines to Spartan fans. MSF buys the figurines from a manufacturer for $10 per unit. They send orders electronically to the manufacturer, costing...
-
How would you do a spend analysis if you were the supply manager for a large state university?
-
Review the new strategic direction for Unilever, as presented at the beginning of this chapter. What are the economic rationales for these seven key strategic imperatives? What are the risks? To what...
-
Visit the Monthly Labor Review Online . Review the two most recent editions, and select two articles from each edition. What topics are discussed, and why do the authors think they are important?...
-
Visit the US Department of Labor, Bureau of Labor Statistics web page and review Occupation Outlooks and Demographics Data. What additional workforce changes do you believe might take place in the...
-
Discuss examples of how the changing economic condition has called for qualifi ed employees who are fl exible and willing to deal with rapid and unstructured changes. Give examples of impacts of...
Study smarter with the SolutionInn App