Read the data in this picture and answer all the Questions!

QUESTIONS:

1. 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.
2. Use the returns calculated in part 1 to find
   1. The standard deviation of the returns for each asset over the 10-year period 2003-2012.
3. Use your findings in part a to evaluate and discuss the return and risk associated with each asset. Which asset appears to be preferable? Explain.
4. Use the CAPM to find the required return for each asset. Compare this value with the average annual returns calculated in part 1.
5. Compare and contrast your findings in parts 3 and 4. What recommendations would you give Jaki with regard to investing in either of the two assets? Explain to Jaki why he is better off using beta rather than the standard deviation and coefficient of variation to assess the risk of each asset.
6. Rework parts 4 and 5 under each of the following circumstances:
   1. A rise of 1 percent in inflationary expectations causes the risk-free rate to rise to 8 percent and the market return to rise to 11 percent.
   2. As a result of favorable political events, investors suddenly become less risk-averse, causing the market return to drop to 10 percent.

Taki Sabri, a financial analyst for Chargers Products, a manufacturer of stadium considering adding these assets to its diversified asset portfolio. To assess the return and risk of each asset, Jaki gathered data on the annual cash flow and beginning- and end-of-year values of each asset over the immediately preceding 10 years, 2003-2012. These data are summarized in the following table. Jaki'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. Return Data for Assets X and Y, 2003-2012 Asset X Asset Y Value Value Year Cash flow Cash flow Beginning Ending 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 US$1,000 1,500 1,400 1,700 1,900 1,600 1,700 2,000 2,100 2,200 Beginning US$20,000 22,000 21,000 24,000 22,000 23,000 26,000 25,000 24,000 27,000 Ending US$22,000 21,000 24,000 22,000 23,000 26,000 25,000 24,000 27,000 30,000 US$1,500 1,600 1,700 1,800 1,900 2,000 2,100 2,200 2,300 2,400 US$20,000 20,000 20,000 21,000 21,000 22,000 23,000 23,000 24,000 25,000 US$20,000 20,000 21,000 21,000 22,000 23,000 23,000 24,000 25,000 25,000 Jaki believes that each asset's risk can be assessed in two ways: in isolation and as part of the firm's 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 asset's risk as part of the firm's portfolio of assets. Applying some sophisticated quantitative techniques, Jaki estimated betas for assets X and Y of 1.60 and 1.10, respectively. In addition, he found that the risk-free rate is currently 7 percent and that the market return is 10 percent. Taki Sabri, a financial analyst for Chargers Products, a manufacturer of stadium considering adding these assets to its diversified asset portfolio. To assess the return and risk of each asset, Jaki gathered data on the annual cash flow and beginning- and end-of-year values of each asset over the immediately preceding 10 years, 2003-2012. These data are summarized in the following table. Jaki'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. Return Data for Assets X and Y, 2003-2012 Asset X Asset Y Value Value Year Cash flow Cash flow Beginning Ending 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 US$1,000 1,500 1,400 1,700 1,900 1,600 1,700 2,000 2,100 2,200 Beginning US$20,000 22,000 21,000 24,000 22,000 23,000 26,000 25,000 24,000 27,000 Ending US$22,000 21,000 24,000 22,000 23,000 26,000 25,000 24,000 27,000 30,000 US$1,500 1,600 1,700 1,800 1,900 2,000 2,100 2,200 2,300 2,400 US$20,000 20,000 20,000 21,000 21,000 22,000 23,000 23,000 24,000 25,000 US$20,000 20,000 21,000 21,000 22,000 23,000 23,000 24,000 25,000 25,000 Jaki believes that each asset's risk can be assessed in two ways: in isolation and as part of the firm's 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 asset's risk as part of the firm's portfolio of assets. Applying some sophisticated quantitative techniques, Jaki estimated betas for assets X and Y of 1.60 and 1.10, respectively. In addition, he found that the risk-free rate is currently 7 percent and that the market return is 10 percent