3. Beckett is a small investor who owns a portfolio currently consisting of equity investments in...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
3. Beckett is a small investor who owns a portfolio currently consisting of equity investments in three assets, which he imaginatively refers to by Asset 'A,' (shares in BMO), Asset 'B' (shares in Allied Properties, a Toronto REIT), and Asset 'C' (shares in Netflix Canada). Thirty percent (30%) of the value of his current portfolio is allocated to his holding of A, which has a forecast annual return of 10%; 50% to B, which has a forecast annual return of 11%, and 20% to C, which has a forecast annual return of 8%. He is considering the transfer of a marginal amount (1%) of his stake in each of these three assets to an investment in Asset D, which is a 50-unit office building in Calgary. Wanting to diversify his sources of investment advice, he asks Vladimir and Estragon, both experienced real estate practitioners, and Rosencrantz and Guildenstern, both experienced practitioners in the financial approach to portfolio management, to advise him whether or not to add D to his portfolio. Both Vladimir and Estragon eschew modern finance theory in favor of the definitions of financial return used by retail estate practitioners, with Vlad favoring the "arithmetic mean" form of return and Estragon the "geometric mean" form of return. Both Rosencrantz and Guildenstern measure portfolio and asset returns by the CAPM method. Assume the riskless interest rate is one percent. Calculate the following: a. Vladimir forecasts the expected annual return to Asset D as 11%. Using the arithmetic mean method to calculate the annual expected return to a portfolio, what does he find for the respective annual expected returns on (i) Beckett's existing portfolio of A,B and C and (ii)his portfolio if he adds asset D? Would Vlad advise Beckett to buy D? b. Rosencrantz forecasts the expected return to D is 6.75%. Based on his measurement of Beckett's portfolio 3 (beta) as .6529, what does Rosencrantz find for the minimum expected return for asset D? Would Rosencrantz advise Beckett to purchase D? c. Estragon, like Vladimir, forecasts the expected annual return to Asset D as 11%. Using the geo- metric mean method to calculate the annual expected return to a portfolio, what does he find for the respective annual expected returns on (1) Beckett's existing portfolio of A,B and C and (ii) his portfolio if he adds asset D? Would Estragon advise Beckett to buy D? d. Based on his measurement of Beckett's portfolio 3 (beta) as .6112, assuming Guildenstern shares the same forecast as Rosencrantz for the expected return to D, what does Guildenstern find for the minimum expected return for asset D? Would he advise Beckett to purchase D? 3. Beckett is a small investor who owns a portfolio currently consisting of equity investments in three assets, which he imaginatively refers to by Asset 'A,' (shares in BMO), Asset 'B' (shares in Allied Properties, a Toronto REIT), and Asset 'C' (shares in Netflix Canada). Thirty percent (30%) of the value of his current portfolio is allocated to his holding of A, which has a forecast annual return of 10%; 50% to B, which has a forecast annual return of 11%, and 20% to C, which has a forecast annual return of 8%. He is considering the transfer of a marginal amount (1%) of his stake in each of these three assets to an investment in Asset D, which is a 50-unit office building in Calgary. Wanting to diversify his sources of investment advice, he asks Vladimir and Estragon, both experienced real estate practitioners, and Rosencrantz and Guildenstern, both experienced practitioners in the financial approach to portfolio management, to advise him whether or not to add D to his portfolio. Both Vladimir and Estragon eschew modern finance theory in favor of the definitions of financial return used by retail estate practitioners, with Vlad favoring the "arithmetic mean" form of return and Estragon the "geometric mean" form of return. Both Rosencrantz and Guildenstern measure portfolio and asset returns by the CAPM method. Assume the riskless interest rate is one percent. Calculate the following: a. Vladimir forecasts the expected annual return to Asset D as 11%. Using the arithmetic mean method to calculate the annual expected return to a portfolio, what does he find for the respective annual expected returns on (i) Beckett's existing portfolio of A,B and C and (ii)his portfolio if he adds asset D? Would Vlad advise Beckett to buy D? b. Rosencrantz forecasts the expected return to D is 6.75%. Based on his measurement of Beckett's portfolio 3 (beta) as .6529, what does Rosencrantz find for the minimum expected return for asset D? Would Rosencrantz advise Beckett to purchase D? c. Estragon, like Vladimir, forecasts the expected annual return to Asset D as 11%. Using the geo- metric mean method to calculate the annual expected return to a portfolio, what does he find for the respective annual expected returns on (1) Beckett's existing portfolio of A,B and C and (ii) his portfolio if he adds asset D? Would Estragon advise Beckett to buy D? d. Based on his measurement of Beckett's portfolio 3 (beta) as .6112, assuming Guildenstern shares the same forecast as Rosencrantz for the expected return to D, what does Guildenstern find for the minimum expected return for asset D? Would he advise Beckett to purchase D?
Expert Answer:
Related Book For
Financial Accounting and Reporting
ISBN: 978-0273744443
14th Edition
Authors: Barry Elliott, Jamie Elliott
Posted Date:
Students also viewed these finance questions
-
Consider a U.S. investor who owns a portfolio of Japanese securities worth 160 million. In order to hedge currency risk, he considers buying currency puts on yen instead of selling futures contracts....
-
A local real estate investor in Orlando is considering three alternative investments: a motel, a restaurant, or a theater. Profits from the motel or restaurant will be affected by the availability of...
-
An investor is considering two investments, an office building and bonds. The possible returns from each investment and their probabilities are as follows: Using expected value and standard deviation...
-
Mount Everest is Earth's highest mountain above sea level, located in the Mahalangur Himal sub-range of the Himalayas. The ChinaNepal border runs across its summit point. Its elevation of 8,848.86 m...
-
A stone is thrown upward at an angle of 53 above the horizontal. Its maximum height during the trajectory is 24 m. What was the stone's initial speed?
-
Two bars are conducting heat from a region of higher temperature to a region of lower temperature. The bars have identical lengths and cross-sectional areas, but are made from different materials. In...
-
Gulino Corporation manufactures snowmobiles in its White Mountain, Wisconsin plant. The following costs are budgeted for the first quarter's operations. Instructions Classify the above costs of...
-
The 23,000-seat City Coliseum houses the local professional ice hockey, basketball, indoor soccer, and arena football teams, as well as various trade shows, wrestling and boxing matches, tractor...
-
3. Here is a picture of the bridge truss, and the given information I 1. AC || DF B 2. E is the midpoint of DF. 3. B is the midpoint of AC. 4. EB AC Fill out the two-column proof to prove that ABED =...
-
You, CPA, work as an associate with Campbell and Associates LLP, a financial and business advisory firm. The board of directors of Pembroke Pulp and Paper Inc. (PPPI) has engaged your firm once again...
-
Journal entry worksheet 1 2 3 4 5 6 7 8 Dollar Store purchases merchandise for $1,100 on terms of 2/5, n/30, FOB shipping point, invoice dated November 1. Note: Enter debits before credits. Date Nov...
-
Which part of the survey described in Exercise 3 represents the descriptive branch of statistics? Make an inference based on the results of the survey. In Exercises 58, determine whether the number...
-
The students receiving bachelor of science degrees from a university include 52 biology majors. In Exercises 58, determine whether the number describes a population parameter or a sample statistic....
-
In a sample of 2061 U.S. workers, 39% say that they are engaged in their work. In Exercises 58, determine whether the number describes a population parameter or a sample statistic. Explain your...
-
The marital statuses of the employees of a casino In Exercises 1114, determine whether the data are qualitative or quantitative. Explain your reasoning.
-
Researchers conduct a study to determine whether a medication based on fish oil known as omega-3 carboxylic acids is effective in reducing the risk of cardiac events in people already at risk. In the...
-
Need the Special Journal, General Journal, Subsidiary Ledgers, and the General Ledger. Paid sates staff wages of $1 .804 for the week up to and including yesterday, Cheque N0. 647. Note that $1 . 143...
-
What is the ideal number of children to have? This question was asked on the Sullivan Statistics Survey I. Draw a dot plot of the variable Children from theSullivanStatsSurveyI data set at...
-
The Blissopia Leisure Group consists of three divisions: Blissopia 1, which operates mainstream bars; Blissopia 2, which operates large restaurants; and Blissopia 3, which operates one hotel the...
-
Discuss the advantages to a company of: (a) Purchasing and cancelling its own shares; (b) Purchasing and holding its own shares in treasury.
-
Liz Collier runs a small delicatessen. Her profits in recent years have remained steady at around 21,000 per annum. This type of business generally ear ns a uniform rate of net profit on sales of...
-
Florescent Minerals processes materials extracted bom mines. The most common raw material that it processes results in three joint products: Sarco, Barco, and Larco. Each of these products can be...
-
Michelle Tracy, a recent graduate of Rolling's accounting program, evaluated the operating performance of Poway Company's six divisions. Michelle made the following presentation to Povvay's Board of...
-
The following information is selected from the records of Burnside Company, which produces and sells two products. Fixed manufacturing overhead costs are \($248,000\), and fixed selling and...
Study smarter with the SolutionInn App