Financial Management Chapter 8 Case Bill Jobs at CompU is looking to expand his product line into cell phones to complement his computer business Warren Lynch suggests purchasing a company that is already established in selling cell phones on university campuses this would not only make CompUs product line more diverse, but it would also expand CompUs geographic area since they could begin to sell computers at the campuses where the cell phone businesses are already established After doing some research, Warren has selected two companies that CompU should examine to purchase CellU and UPhone Data on the two companies and the Market are given below Table 1 Probability Distribution Data Rate of Return Under these conditions Economy Prob T Bills Market CellU UPhone Strong 0 25 6 0 20 50 0 8 0 Normal 0 50 6 0 12 0 16 0 12 0 Weak 0 25 6 0 4 0 30 0 32 0 Table 2 Time Series Data Year Market CellU UPhone 2003 13 0 6 0 40 0 2004 6 0 41 0 15 0 2005 2 0 7 0 10 0 2006 20 0 20 0 15 0 2007 25 0 11 0 50 0 Find the expected returns, standard deviations, and coefficients of variation for assets in Table 1, then rank the assets from least risky to most risky based on their standard deviations and coefficients of variation Using the historical returns data in Table 2 to calculate Market, CellU, and UPhones expected returns, standard deviations, beta coefficients, and correlation coefficients with the Market Re rank the assets from least risky to most risky Now use the data in Table 2 to calculate the returns and standard deviations on portfolios consisting of 50 each of CellU and UPhone for the period 2003 2007 Also, calculate the correlation coefficient between CellU and UPhone Is the probability data give in Table 1 consistent with the time series data given in Table 2 If the securities expected values and standard deviations as shown in the two sets of data are different, does this prove that something is wrong with the data i e that one or the other data sets must be incorrect Based on your findings, which company should CompU invest in Why

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Financial Management Chapter 8 Case Bill Jobs at CompU is looking to expand his product line into cell phones to complement his computer business. Warren

Financial Management

Chapter 8 Case

Bill Jobs at CompU is looking to expand his product line into cell phones to complement his computer business. Warren Lynch suggests purchasing a company that is already established in selling cell phones on university campuses; this would not only make CompUs product line more diverse, but it would also expand CompUs geographic area since they could begin to sell computers at the campuses where the cell phone businesses are already established. After doing some research, Warren has selected two companies that CompU should examine to purchase CellU and UPhone. Data on the two companies and the Market are given below.

Table 1 - Probability Distribution Data

Rate of Return Under these conditions
Economy	Prob.	T-Bills	Market	CellU	UPhone
Strong	0.25	6.0%	20%	50.0%	-8.0%
Normal	0.50	6.0%	12.0%	16.0%	12.0%
Weak	0.25	6.0%	-4.0%	-30.0%	32.0%

Table 2 - Time Series Data

Year	Market	CellU	UPhone
2003	13.0%	-6.0%	40.0%
2004	-6.0%	41.0%	-15.0%
2005	-2.0%	7.0%	-10.0%
2006	20.0%	20.0%	-15.0%
2007	25.0%	-11.0%	50.0%

Find the expected returns, standard deviations, and coefficients of variation for assets in Table 1, then rank the assets from least risky to most risky based on their standard deviations and coefficients of variation.

Using the historical returns data in Table 2 to calculate Market, CellU, and UPhones expected returns, standard deviations, beta coefficients, and correlation coefficients with the Market. Re-rank the assets from least risky to most risky.

Now use the data in Table 2 to calculate the returns and standard deviations on portfolios consisting of 50% each of CellU and UPhone for the period 2003-2007. Also, calculate the correlation coefficient between CellU and UPhone.

Is the probability data give in Table 1 consistent with the time series data given in Table 2? If the securities expected values and standard deviations as shown in the two sets of data are different, does this prove that something is wrong with the data; i.e. that one or the other data sets must be incorrect?