Question :

Yousif Sadek, a financial analyst for Itqan Products, a manufacturer of Sports equipment, 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, Yousif gathered data on the annual cash flow and beginning- and end-of-year values of each asset over the immediately preceding 10 years, 20102019. These data are summarized in the accompanying table. Yousifs investigation suggests that both assets, on average, will tend to perform in the future just as they

		Return Data for Assets X and Y, 2010-2019 Asset X			Asset Y
		Value			Value
Year	Cash flow	Beginning	Ending	Cash flow	Beginning	Ending
2010	SI,000	$20,000	$22,000	$1,500	$20,000	$20,000
2011	1,500	22,000	21,000	1,600	20,000	20,000
2012	1,400	21,000	24,000	1,700	20,000	21,000
2013	1,700	24,000	22,000	1,800	21,000	21,000
2014	1,900	22,000	23,000	1,900	21,000	22,000
2015	1,600	23,000	26,000	2,000	22,000	23,000
2016	1,700	26,000	25,000	2,100	23,000	23,000
2017	2,000	25,000	24,000	2,200	23,000	24,000
2018	2,100	24,000	27,000	2,300	24,000	25,000
2019	2,200	27,000	30,000	2,400	25,000	25,000

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.

Yousif believes that each assets risk can be assessed in two ways: in isolation and as part of the firms diversified portfolio of assets. The risk of the assets in isolation can be found by using the standard deviation and coefficient of variation of returns over the past 10 years. The capital asset pricing model (CAPM) can be used to assess the assets risk as part of the firms portfolio of assets. Applying some sophisticated quantitative techniques, Yousif estimated betas for assets X and Y of 1.60 and 1.10, respectively. Also, he found that the risk-free rate is currently 7% and that the market return is 10%.

Required

a. Calculate the annual rate of return for each asset in each of the 10 preceding years and use those values to find the average annual return for each asset over the 10-year period.

b. Use the returns calculated in part to find (1) the standard deviation and (2)the coefficient of variation of the returns for each asset over the 10-year period 20102019.

c. Use your findings in parts a and b to evaluate and discuss the return and risk associated with each asset. Which asset appears to be preferable? Explain.

d. Use the CAPM to find the required return for each asset. Compare this value with the average annual returns calculated in part a.

e. Compare your findings in parts c and d. What recommendations would you give Yousif about investing in either of the two assets? Explain to Yousif why he is better off using beta rather than the standard deviation and coefficient of variation to assess the risk of each asset.