China Development Industrial Bank

5637 WordsJul 7, 201123 Pages
CHINA DEVELOPMENT INDUSTRIAL BANK A case study Submitted to: Dr. Felix D. Cena, Phd Submitted by: Jose Farley Y. Tagle Lalaine D. Cosadio Cherryl L. Villaruel Raymund S. Belleza July 17, 2011 Given: Assume that you recently graduated with a major in finance. You just landed a job as a financial planner with China Development Industrial bank (CDIB), a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the funds to be invested in a business at the end of 1 year, you have been instructed to plan a 1-year holding period. Further, your boss has restricted you to the investment alternatives in the following table, shown ith their probabilities and associated outcomes.…show more content…
High Tech Inc. is an electronics firm. When the state of the economy is above average or at its boom, consumers purchase more products of High Tech Inc. than they would if the state of the economy gets worse. Under this circumstance, we would expect High Tech’s stock price to be high if the economy is well. Thus, High Tech’s returns are positively correlated with the economy because the firm’s sales, and hence profits will experience the same ups and downs with the economy. The opposite holds true with Collections Inc. because the nature of the business is on collections of past-due debts. If the economy is in recession, people are not expected to pay their debts on time. Consequently, this firm will be collecting a lot of past-due debts, thus making its stock price to increase. The opposite will happen if the economy is performing well. This explains why Collection’s expected return moves counter the economy. Collections Inc. is considered by many investors to be a hedge against bad times and high inflation, so if the stock market crashes, investors in this stock should do relatively well. Therefore, this stock is negatively correlated with the economy. b. Calculate the expected rate of return on each alternative and fill in the blanks on the row for r(hat) or the expected rate of return in the previous table. The expected rate of return, , is expressed as follows: Here is the

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