Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You have two possible projects for your business, and you are trying to identify the future year uncertainties for each project's cashflow. For each project,

image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
You have two possible projects for your business, and you are trying to identify the future year uncertainties for each project's cashflow. For each project, you estimated that there will be five different scenarios of cash flow with different probabilities, as shown below: a) Calculate the expected cash flow of each project. b) Calculate the standard deviation and coefficient of variation of each project. Which project is riskier? c) To lower the overall business risk, you decided to invest in both projects. You allocate 60% of your money in Project A, and 40\% in Project B. The correlation coefficient between A and B is 0.5 . What is the expected return for the diversified business? d) What is the standard deviation of the diversified business? e) Now, assume that the correlation coefficient is -0.5 . What will happen to the standard deviation relative to your answer in part e ? (No need to show the calculation) f) What are some of the pros and cons of having two projects with negative correlation? You have two possible projects for your business, and you are trying to identify the future year uncertainties for each project's cashflow. For each project, you estimated that there will be five different scenarios of cash flow with different probabilities, as shown below: a) Calculate the expected cash flow of each project. b) Calculate the standard deviation and coefficient of variation of each project. Which project is riskier? c) To lower the overall business risk, you decided to invest in both projects. You allocate 60% of your money in Project A, and 40\% in Project B. The correlation coefficient between A and B is 0.5 . What is the expected return for the diversified business? d) What is the standard deviation of the diversified business? e) Now, assume that the correlation coefficient is -0.5 . What will happen to the standard deviation relative to your answer in part e ? (No need to show the calculation) f) What are some of the pros and cons of having two projects with negative correlation

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Enterprise Risk Management In Finance

Authors: David L. Olson, Desheng Dash Wu

1st Edition

1349691038, 978-1349691036

More Books

Students also viewed these Finance questions