Question
Review the excerpted table of historic returns shown below. The returns have all been annualized after having calculated monthly returns for the previous ten years.
Review the excerpted table of historic returns shown below. The returns have all been annualized after having calculated monthly returns for the previous ten years. In addition, information is provided about the average, the volatility, and the sensitivity of the possible investments.
Time Period # | Market Return | Firm W | Firm X | Firm Y | Firm Z | T-Bill |
1 | 0.333 | 0.191 | 0.218 | 0.955 | 0.601 | 0.035 |
2 | -0.144 | -0.423 | -0.632 | -0.747 | -0.472 | 0.039 |
3 | 0.143 | 0.348 | 0.470 | 0.379 | 0.378 | 0.040 |
4 | 0.316 | 0.871 | 0.868 | -0.192 | 0.502 | 0.036 |
5 | 0.178 | 0.912 | 0.499 | 0.694 | 0.364 | 0.036 |
6 | -0.014 | 0.532 | 0.168 | -0.671 | -0.064 | 0.038 |
119 | 0.374 | 0.556 | 1.014 | 0.023 | 0.698 | 0.037 |
120 | 0.173 | 0.547 | 0.092 | 0.658 | 0.222 | 0.036 |
Average Return | 0.082 | 0.113 | 0.067 | 0.167 | 0.121 | 0.029 |
Standard Deviation | 0.156 | 0.369 | 0.497 | 0.398 | 0.456 | 0.011 |
Beta | 1.00 | 1.21 | 0.89 | 1.41 | 1.25 | 0.00 |
Firm Y has a Debt/Equity Ratio of 0.75 and a Tax Rate of 20%, while Firm Z has a Debt/Equity Ratio of 0.25 and a Tax Rate of 20%.
Which of the following statements is true, concerning the two firms leverage and sensitivity?
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