Problem set 5

Question 1.

Ryan, a financial analyst for DMC Products, a manufacturer of school benches, must evaluate the risk and return of two assets, X and Y. The firm is considering adding these assets to its diversified asset portfolio. To assess the return and risk of each asset, Ryan gathered data on the annual cash flow and beginning- and end-of-year values of each asset over the immediately pre- ceding 10 years, 1994-2003. These data are summarized in the accompanying table. Ryan's investigation suggests that both assets, on average, will tend to perform in the future just as they have during the past 10 years. He therefore believes that the expected annual return can be estimated by finding the average annual return for each asset over the past 10 years.