Case Questions prices equally likely. However, she be- 1. Compute expected return and stan. dard deviation of annual return for lieved the probability of a strong economy each alternative separately. was twice that of a weak economy. She did not believe a weak economy was likely to 2. Compute covariance of annual returns between the Alaska and Hous last more than 2 years. Low oil prices, on the other hand, could continue for at least ton offices, and between the California and Houston offices. 5 years. Oil prices and the economy were both strong at the moment. 3. Compute the expected return and It would cost approximately $75,000 to standard deviation for each of the two open an office in either San Francisco or combinations. Alaska. The costs would be primarily de- 4. Prepare pro forma statements for velopment costs and would be expensed each new office combined with the for tax purposes. Fixed assets included in Houston office, using each of the four this cost would be under $10,000, and a possible conditions. provision of the tax law allowed expensing 5. What would you recommend to Cot- up to $10,000 of fixed asset acquisitions. ner? Why