# A financial analyst for Smart Securities Limited, Paul Chan, wishes to estimate the rate of return for two similar-risk investments,

## Question:

A financial analyst for Smart Securities Limited, Paul Chan, wishes to estimate the rate of return for two similar-risk investments, A and B. Paul’s research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year ago, investment A and investment B had market values of $63,000 and $35,000, respectively. During the year, investment A generated cash flows of $6,100, and investment B generated cash flows of $2,800. The current market values of investments A and B are $71,000 and $32,000, respectively.

a. Calculate the expected rate of return on investments A and B using the most recent year’s data.

b. Assuming that the two investments are equally risky, which one should Paul recommend? Why?

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**Related Book For**

## Principles Of Managerial Finance

**ISBN:** 9781292018201

14th Global Edition

**Authors:** Lawrence J. Gitman, Chad J. Zutter

**Question Details**

**8**- Risk and Return

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