Essay About Real Benefit And Unacceptable Investment

Finance
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End of Chapter Key
Chapters 4,5,6 and8
Chapter 4
A. PV = $18,000; FV = $30,000; N=5
Using Financial Calculator (HP 10BII), find rate of return in this investment
18,000 +/-
30,000
10.75%
Since 10.75% > 10.0%
Acceptable investment
B. I/YR 8.73%
Since 8.73% < 10.0% Unacceptable investment C. I/YR 11.06% Since 11.06% > 10.0%
Acceptable investment
D. . I/YR 7.0%
Since 7.0% < 10.0% Unacceptable investment Holding period return (HPR) Ñ"­ If the investments are held beyond a year, the capital gain (loss) component would not be realized and would likely change. Assuming they are of equal risk, Investment Y would be preferred since it offers the higher return (16.0% for Y versus 11.67% for X). Investment A, with returns that vary widelyÐŽXfrom 1% to 26%ÐŽXappears to be more risky than Investment B, whose returns vary from 8% to 16%. Investment A: Return Average (1) ÐŽV (2) Return, r ri ÐŽV r (ri ÐŽV r)2 ÐŽV11 Investment B: Return Average (1) ÐŽV (2) Return, r ri ÐŽV r (ri ÐŽV r)2 ÐŽV4% Investment A, with a standard deviation of 10.42, is considerably more risky than Investment B, whose standard deviation is 3.16. This confirms the conclusions reached in Part A. Because the real benefit of calculating the coefficient or variation is in comparing investments that have different average returns, the standard deviation is not improved upon. Chapter 5 Average portfolio return for each year: rp Ñ"­ (wL „e rL) Ñ"y (wM „e rM) Asset L (wL „e rL) Asset M (wM „e rM) Expected Portfolio Return (14% „e 0.40 Ñ"­ 5.6%) (20% „e 0.60 Ñ"­ 12.0%) 17.6% (14% „e 0.40 Ñ"­ 5.6%) (18% „e 0.60 Ñ"­ 10.8%) 16.4% (16% „e 0.40 Ñ"­ 6.4%) (16% „e 0.60 Ñ"­ 9.6%) 16.0% (17% „e 0.40 Ñ"­ 6.8%) (14% „e 0.60 Ñ"­ 8.4%) 15.2% (17% „e 0.40 Ñ"­ 6.8%) (12% „e 0.60 Ñ"­ 7.2%) 14.0% (19% „e 0.40 Ñ"­ 7.6%) (10% „e 0.60 Ñ"­ 6.0%) 13.6% Portfolio Return: Standard Deviation: The assets are negatively correlated. By combining these two negatively correlated assets, overall portfolio risk is reduced. If the risk-free rate is 7% and the market return is 12%. Vehicle E is the most risky because it has the highest beta, 2.00. Vehicle D, with a beta of 0, is the least risky. Capital Asset Pricing Model: ri Ñ"­ RF Ñ"y [bi „e (rm ÐŽV RF)] Investment RF Ñ"y [bi „e (rm ÐŽV RF)]   A 14.5% 7% Ñ"y [1.50 „e (12% ÐŽV 7%)]   B 7% Ñ"y [1.00 „e (12% ÐŽV 7%)]   C 10.75% 7% Ñ"y [0.75 „e (12% ÐŽV 7%)]   D   E 7% Ñ"y [2.00 „e (12% ÐŽV 7%)] The figure showing the security market line (SML) can be found on the bookÐŽ¦s Web site at www.awl.com/gitman_joehnk. Based on the above graph and the calculations, there is a linear relationship between risk and return. Stock Most risky Least risky ÐŽV0.30 and (c). Stock Increase