Filmore Enterprises Essay examples

B. The OIP has more return and less risk for all investors, regardless of home country

4. The various weighted combinations of stocks that create this standard deviations constitute the set of efficient portfolios.

11. Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. Which of the following are cash flows relevant to the new product?

* Remember the firm has a limited capital budget of $2.4 million for the coming year. In other words, the firm faces the capital rationing, see pp. 589-592. Use the profitability index as it s investment criterion.

say that rail and air stocks have a strong correlation. Therefore, to achieve superior diversification, you would

d) If the return on bonds increases from 10% to 13%, what will happen to the optimal allocation of funds?

1b. if you used the CAPM, which risk premium and risk free rate did you use? Why?

A diverse portfolio means you may have money in savings accounts, commodities, futures, private businesses, etc. A less-safe portfolio may only have money in one area such as in a private business or in stocks. If you have a diverse portfolio on a macro level, then it means you can absorb loss and still come out on top.

As seen in exhibit 11 if we add MCD to our portfolio and solve for without short selling we can see that the efficient frontier moved to the left. In other words it improved. This is due to diversification. By the same intuition, as seen in exhibit 12, if we add LMT to our portfolio efficient frontier improved even further. To see the difference, we can check exhibit 12.The reason that adding LMT improved efficient frontier even further is because of the fact that while MCD has positive correlation as seen in the correlation matrix ,in exhibit 1 whereas LMT is negatively correlated leading to more reduction in the risk of the portfolio due to diversification. Due to the point where the curves intersect (the point when expected return is between 1.5 and 1.75) the portfolios including LMT are more efficient until expected return is 1.75 whereas after the point the portfolios with MCD become more efficient if expected return is equal to higher than 1.75.This may be due to the marginal diminishing returns that reverse the marginal utility the portfolio gains by increasing expected return. Up to that point if we divide the expected

Suppose the price of Apple stock goes up by $25, Cisco rises by $5, and Colgate-Palmolive falls by $13. What are the new portfolio weights?

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.

d. Financial managers often opt for investments that offers return (ROI) in proportion to the risk taken. Thus, the managers with the risk averse will certainly choose investment X because of it required return that increase in proportion to the risk.

B. What is the expected growth rate in earnings, if the restructuring plan described above is put into effect?

Modern portfolio theory says that portfolio variance can be reduced by choosing asset classes with a low or negative covariance, such as stocks and bonds. This type of diversification is used to reduce risk.

When your assets are widely diversified, your portfolio tends to perform in a similar way to the market as a whole. If you own stocks in 20 different areas and one of them takes a dive, it's unlikely that your portfolio will suffer terribly. Diversification is the best way to increase the stability of your investments and decrease your risk of losing money in the event