Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

- Assume that you recently graduated with a major in finance and just landed a job in the trust department of a large regional bank.

image text in transcribed
- Assume that you recently graduated with a major in finance and just landed a job in the trust department of a large regional bank. Your first assignment is to invest $100,000 from an estate for which the bank is trustee. Because the estate is expected to be distributed to the heirs in approximately one year, you have been instructed to plan for a one-year holding period. Furthermore, your boss has restricted you to the following investment altematives, shown with their probabilities and associated outcomes. The bank's economic forecasting staff has developed probability estimates for the state of the economy, and the rate of return on each alternative is estimated under each state of the economy. High Tech, Inc., is an electronics firm; Collections, Inc., a firm collects past-due debts; and U.S. Rubber manufactures tires and various other rubber and plastic products. - Given the situation as described, discuss the following questions: 1. Calculate the expected rate of return on each alternative. Which alternative has the highest return and which one has the lowest return? 2. Calculate the riskiness of each alternative using the standard deviation of returns. What type of risk does the standard deviation measure? 3. Calculate the coefficient of variations (CVs) for the different securities and rank the alternatives based on the CVs. Does the CV measurement produce the same risk rankings as the standard deviation? 4. Suppose you created a two-stock portfolio by investing $50,000 in High Tech and $50,000 in Collections. Calculate the expected return rP, the standard deviation ( p), and the coefficient of variation (CVp) for this portfolio. How does the riskiness of this twostock portfolio compare to the riskiness of the individual stocks if they were held in isolation? 5. Suppose an investor starts with a portfollo consisting of one randomly selected stock. What would happen (1) to the riskiness and (2) to the expected return of the portfolio as more randomly selected stocks are added to the portfolio? What is the implication for investors? Draw two graphs to lilustrate your answer. - Refer to the table below

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Future For Investors

Authors: Jeremy Siegel

1st Edition

140008198X, 978-1400081981

More Books

Students also viewed these Finance questions

Question

What was the positive value of Max Weber's model of "bureaucracy?"

Answered: 1 week ago

Question

1. What is the origin of the communication discipline?

Answered: 1 week ago

Question

2. What methods do communication scholars use to conduct research?

Answered: 1 week ago