Accouting-Financial Management

 

 

 

 

 

1. (Expected rate of return and risk) B.J Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 4.1 percent. Calculate the investment’s expected return and its standard deviation should Gautney invest in this security?

 

 

 

Probability	Return
0.10	-5%
0.50	3%
0.30	5%
0.10	8%

 

 

 

 

 

 

 

 

 

 

 

1. The investment’s expected return is ……. %

 

 

 

 

 

1. (Expected rate of return) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund’s investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund’s performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following outcomes:

 

                                                       Data Table

 

State of Economy	Probability	Fund Return
Rapid expansion and recovery	5%	100%
Modest growth	30%	30%
Continued recession	60%	10%
Falls into depression	5%	-100%

 

 

 

1. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?

2. Calculate the standard deviation in the anticipated returns found in part a.

3. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid expansion.

 

 

 

1. The expected rate of return from this investment opportunity is ……….. %

 

 

 

 

 

 

 

 

 

1. (Systematic risk and expected rates of return )  The following table (See below) contains beta coefficient estimates for six firms. Calculate the expected increase in the value of each firm’s shares if the market portfolio were to increase by 10 percent. Perform the same calculation where the market drops by 10 percent. Which set of firms has the most variable or volatile stock returns?

 

Company	Yahoo Finance (Yahoo.com)
Computers and Software
Apple Inc. (AAPL)	2.29
Dell Inc. (DELL)	1.75
Hewlett Packard (HPQ)	1.21
Utilities
American Electric Power Co. (AEP)	0.79
Duke Energy Corp. (DUK)	0.51
CenterPoint Energy (CNP)	0.91

 

 

 

 

 

Input the expected increase in the value of each firm’s shares if the market portfolio were to increase by 10%.

 

 

 

Company	Yahoo Finance (Yahoo.com) Beta Estimate	Expected Increase
Computers and Software
Apple Inc. (AAPL)	2.29	%
Dell Inc. (DELL)	1.75	%
Hewlett Packard (HPQ)	1.21	%
Utilities
American Electric Power Co. (AEP)	0.79	%
Duke Energy Corp. (DUK)	0.51	%