Help Last edit was made 16 minutes ago by anonymous 100% $ $.00 123 Times New.. - 10 BISA. - T - 'Assume that you recently graduated with MBA major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corp 10 saat ha aliasat atta H Theory by en in 2017 are preved by con Case 1 Assume that you recently graduated with MBA major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the funds are to be invested in a business at the end of 1 year, you have been instructed to plan for a 1 year holding period. Further, your boss has restricted you to the following investment alternatives, shown with their probabilities and associated outcomes. Barney Smith's economic forecasting staff has developed estimates for the state of the economy and its security analyst have developed a sophisticated computer program which was used to estimate the rate of return on each state of the economy. Alta Industries, Inc. is an electronics firm; Repo Men Inc. collects past due debts; and Canadian Foam manufactures mattresses and various other foam products. Barney Smith also maintains an "index fund" which owns a market-weighted fraction of all publicly traded stocks, you can invest in that fund, and thus obtain average stock market results. Given the situation as described, answer the following questions. Repo Men State of Economy Recession Below Average Average Above Average Boom 2-Stock Portfolio 3.0096 Probability 0.1 0.2 0.4 0.2 0.1 T Bills 8.00% 8.0096 8.0096 8.00% 8.00% Returns on Alternative Investments Estimated Rate of Return Canadian Foam Market Port 28.0098 10.0096 -13.00% 14.70% -10.00% 1.00% 0.009 7.0096 15.0096 -10.00% 45.0096 29.00% -20.00% 30.00% 43.0096 Alta Inds. -22.00% -2.00% 20.0096 35.00% 30.000 6 10.0096 15.00% - T- Case 1 Caso 2 Caso 3 e D O Spring2020 Final Assignment File Edit View Insert Format Data Tools Add-ons Help Last edit was made 16 minutes ago by anonymous 100% $ %0.09 123 Times New... | 10 - BISA - B 33 ET - PL - - 'Assume that you recently graduated with MBA major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corp Lallandat D 1. (1.) Why is the T-bill's return independent of the state of the economy? Do T-bills promise a completely risk free return? (2.) Why are Alta Inds' returns expected to move with the economy whereas Repe Men's are expected to move counter to the economy? b. Calculate the expected rate of return on each alternative. 100 feet in the found laala E F H c. You should recognize that basing a decision solely on expected returns is only appropriate for risk-neutral individuals. Since your client, like virtually everyone, is risk averse, the riskiness of each alternative is an important aspect of the decision. One possible measure of risk is the standard deviation of returns (1.) Calculate the standard deviation for each alternative. (2.) What type of risk is measured by the standard deviation? d. Suppose you suddenly remembered that the coefficient of variation (CV) is generally regarded as being a better measure of stand-alone risk than the standard deviation when the alternatives being considered have widely differing expected returns. Calculate the missing CVs and fill in the blanks on the row for CV. Does the CV produce the same risk rankings as the standard deviation? e. Suppose you created a 2-stock portfolio by investing $50,000 in Alta Inds, and $50,000 in Repo Men. (1.) Calculate the expected return, the standard deviation, and the coefficient of variation (CVP) for this portfolio. (2.) How does the risk of this 2-stock portfolio compare with the risk of the individual stocks if they were held in isolation? 1. Suppose an investor starts with a portfolio consisting of one randomly selected stock. What would happen (1) to the risk and (2) to the expected return of the portfolio as more and more randomly selected stocks were added to the portfolio? What is the implication for investors? Draw a graph of the two portfolios to illustrate your answer Case 1 Caso a X NE Spring2020 Final Assignment File Edit View Insert Format Data Tools Add-ons Help Last edit was made 16 minutes ago by anonymous 100% $ % 0 .00 123 Times New. - 10 BIGA ET-121- 'Assume that you recently graduated with MBA major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corpor fasen c D H answer. s() should portfolio effects impact the way investors think about the risk of individual stocks? (2.) If you decided to hold a 1-stock portfolio, and consequently were exposed to more risk than diversified investors, could you expect to be compensated for all of your risk; that is could you earn a risk premium on that part of your risk that you could have eliminated by diversifying? h. How is risk measured for individual securities? How are beta coefficients calculated?(1.) Do the expected returns appear to be related to each alternative's market risk? (2.) Is it possible to choose among the alternatives on the basis of the information developed so far? 1. (1.) Write out the Security Market Line (SML) equation, use it to calculate the required rate of return on each alternative, and then graph the relationship between the expected and required rates of return.(2.) How do the expected rates of return compare with the required rates of return?3) Does the fact that Repo Men has an expected return which is less than the t-bill rate make any sense?(4.) What would be the market risk and the required return of a 50-50 portfolio of Alta Inds, and Repo Men? (1.) Suppose investors raised their inflation expectations by 3 percentage points over current estimates as reflected in the 8 percent T-bill rate. What effect would higher inflation have on the SML, and on the returns required on high and low-risk securities? (2.) Suppose instead that investors' risk aversion increased enough to cause the market risk premium to increase by 3 percentage points. (Inflation remains constant.) What effect would this have on the SML and on returns of high and low-risk securities? Case 1 Case 2 Case 3 e Help Last edit was made 16 minutes ago by anonymous 100% $ $.00 123 Times New.. - 10 BISA. - T - 'Assume that you recently graduated with MBA major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corp 10 saat ha aliasat atta H Theory by en in 2017 are preved by con Case 1 Assume that you recently graduated with MBA major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the funds are to be invested in a business at the end of 1 year, you have been instructed to plan for a 1 year holding period. Further, your boss has restricted you to the following investment alternatives, shown with their probabilities and associated outcomes. Barney Smith's economic forecasting staff has developed estimates for the state of the economy and its security analyst have developed a sophisticated computer program which was used to estimate the rate of return on each state of the economy. Alta Industries, Inc. is an electronics firm; Repo Men Inc. collects past due debts; and Canadian Foam manufactures mattresses and various other foam products. Barney Smith also maintains an "index fund" which owns a market-weighted fraction of all publicly traded stocks, you can invest in that fund, and thus obtain average stock market results. Given the situation as described, answer the following questions. Repo Men State of Economy Recession Below Average Average Above Average Boom 2-Stock Portfolio 3.0096 Probability 0.1 0.2 0.4 0.2 0.1 T Bills 8.00% 8.0096 8.0096 8.00% 8.00% Returns on Alternative Investments Estimated Rate of Return Canadian Foam Market Port 28.0098 10.0096 -13.00% 14.70% -10.00% 1.00% 0.009 7.0096 15.0096 -10.00% 45.0096 29.00% -20.00% 30.00% 43.0096 Alta Inds. -22.00% -2.00% 20.0096 35.00% 30.000 6 10.0096 15.00% - T- Case 1 Caso 2 Caso 3 e D O Spring2020 Final Assignment File Edit View Insert Format Data Tools Add-ons Help Last edit was made 16 minutes ago by anonymous 100% $ %0.09 123 Times New... | 10 - BISA - B 33 ET - PL - - 'Assume that you recently graduated with MBA major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corp Lallandat D 1. (1.) Why is the T-bill's return independent of the state of the economy? Do T-bills promise a completely risk free return? (2.) Why are Alta Inds' returns expected to move with the economy whereas Repe Men's are expected to move counter to the economy? b. Calculate the expected rate of return on each alternative. 100 feet in the found laala E F H c. You should recognize that basing a decision solely on expected returns is only appropriate for risk-neutral individuals. Since your client, like virtually everyone, is risk averse, the riskiness of each alternative is an important aspect of the decision. One possible measure of risk is the standard deviation of returns (1.) Calculate the standard deviation for each alternative. (2.) What type of risk is measured by the standard deviation? d. Suppose you suddenly remembered that the coefficient of variation (CV) is generally regarded as being a better measure of stand-alone risk than the standard deviation when the alternatives being considered have widely differing expected returns. Calculate the missing CVs and fill in the blanks on the row for CV. Does the CV produce the same risk rankings as the standard deviation? e. Suppose you created a 2-stock portfolio by investing $50,000 in Alta Inds, and $50,000 in Repo Men. (1.) Calculate the expected return, the standard deviation, and the coefficient of variation (CVP) for this portfolio. (2.) How does the risk of this 2-stock portfolio compare with the risk of the individual stocks if they were held in isolation? 1. Suppose an investor starts with a portfolio consisting of one randomly selected stock. What would happen (1) to the risk and (2) to the expected return of the portfolio as more and more randomly selected stocks were added to the portfolio? What is the implication for investors? Draw a graph of the two portfolios to illustrate your answer Case 1 Caso a X NE Spring2020 Final Assignment File Edit View Insert Format Data Tools Add-ons Help Last edit was made 16 minutes ago by anonymous 100% $ % 0 .00 123 Times New. - 10 BIGA ET-121- 'Assume that you recently graduated with MBA major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corpor fasen c D H answer. s() should portfolio effects impact the way investors think about the risk of individual stocks? (2.) If you decided to hold a 1-stock portfolio, and consequently were exposed to more risk than diversified investors, could you expect to be compensated for all of your risk; that is could you earn a risk premium on that part of your risk that you could have eliminated by diversifying? h. How is risk measured for individual securities? How are beta coefficients calculated?(1.) Do the expected returns appear to be related to each alternative's market risk? (2.) Is it possible to choose among the alternatives on the basis of the information developed so far? 1. (1.) Write out the Security Market Line (SML) equation, use it to calculate the required rate of return on each alternative, and then graph the relationship between the expected and required rates of return.(2.) How do the expected rates of return compare with the required rates of return?3) Does the fact that Repo Men has an expected return which is less than the t-bill rate make any sense?(4.) What would be the market risk and the required return of a 50-50 portfolio of Alta Inds, and Repo Men? (1.) Suppose investors raised their inflation expectations by 3 percentage points over current estimates as reflected in the 8 percent T-bill rate. What effect would higher inflation have on the SML, and on the returns required on high and low-risk securities? (2.) Suppose instead that investors' risk aversion increased enough to cause the market risk premium to increase by 3 percentage points. (Inflation remains constant.) What effect would this have on the SML and on returns of high and low-risk securities? Case 1 Case 2 Case 3 e