1. Introduction about this diagram
2. Objective about this diagram
3. Which is a better measure of risk for the ordinary shares of the IT firm and the Grocery firm – the standard deviation you calculated in Question 4, or the beta? Why?
4. Based on the beta provided, what is the expected rate of return for Logical IT and Safeworth Grocery for the next year? Which company will have higher value if their future cash flows are identical? Why?

Transcribed Image Text:

Economic Condition Recession Normal Expansion Boom Probability 30% 20% 35% 15% Estimated rate of Return from Investment Logical IT -20% 15% 30% 50% Safeworth Grocery 5% 6% 8% 10% ASX 200 -4% 11% 17% 27% You are told that a one-year Treasury note will have a rate of return of 5% over the next year. Also, information from an investment advisory service lists the current beta for Logical IT as 1.70 and for Safeworth Grocery as 0.60. Following data was presented to you. You are also provided a series of questions to guide your analysis. Economic Condition Recession Normal Expansion Boom Probability 30% 20% 35% 15% Estimated rate of Return from Investment Logical IT -20% 15% 30% 50% Safeworth Grocery 5% 6% 8% 10% ASX 200 -4% 11% 17% 27% You are told that a one-year Treasury note will have a rate of return of 5% over the next year. Also, information from an investment advisory service lists the current beta for Logical IT as 1.70 and for Safeworth Grocery as 0.60. Following data was presented to you. You are also provided a series of questions to guide your analysis.

Answer rating: 100% (QA)

1 1 Introduction about the diagram The diagram shows a table showing the expected rate of return from an investment in Logical IT and Safeworth Grocery for different economic conditions The table also ... View the full answer