Case Study: Assessing Asset X and Y

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Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Cash Flow 1,000 1,500 1,400 1,700 1,900 1,600 1,700 2,000 2,100 2,200 1.60 1.00 0.07 0.05 Asset X Value Beginning 20,000 22,000 21,000 24,000 22,000 23,000 26,000 25,000 24,000 27,000 Ending 22,000 21,000 24,000 22,000 23,000 26,000 25,000 24,000 27,000 30,000 Beta (X) Beta (Y) Risk Free Rate EMPR a. Calculate the annual rate of return for each asset in each of the 10 preceding years, and use those v the average annual return for each asset over the 10-year period. Return (X) Return (Y) 15.00% 2.27% 20.95% -1.25% 13.18% 20.00% 2.69% 4.00% 21.25% 19.26% 11.74% 7.50% 8.00% 13.50% 8.57% 13.81% 13.64% 9.13% 13.91% 13.75% 9.60% 11.14% 2000 2001 2002 2003 2004 2005 2006…show more content…
A rational investor should avoid both assets. e. Compare and contrast your findings in parts c and d. What recommendations would you give M regard to investing in either of the two assets? Explain to Mary why she is better off using beta rat standard deviation and coefficient of variation to assess the risk of each asset. In part c, we concluded that it would be difficult to make a choice between X and Y because the additional may or may not provide the needed compensation for the extra risk. In part d, by calculating a required rat was easy to reject both X and Y. The required return on both assets are above their expected returns. Clearly, Charger Products is better off using the standard deviation and coefficient of variation, rather than subjective approach, to assess investment risk. Beta and CAPM, however, provide a link between risk and quantify risk and convert it into a required return that can be compared to the expected return to draw a de conclusion about investment acceptability. Contrasting the conclusions in the responses to parts c and d a clearly demonstrate why Mary is better off using beta to assess risk. Also, since Mary holds a diversified p systematic risk is the relevant risk for her to be concerned about. Since firm specific risk can be diversified portfolio, focusing on total risk (or standard deviation) may lead to distorted investment decisions. Asset Y Value Cash Flow Beginning Ending

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