Benefits of diversification Sally Rogers has decided to invest her wealth equally across the following three assets: a. What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset Malone? Hint. Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O. b. Could Sally reduce her total risk even more by using assets M and N only, assets M and O only, or assets N and O only? Use a 50/50 split between the asset pairs, and find the standard deviation of each asset pair. a. What is the expected return of investing equally in all three assets M, N, and O? % (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) States Boom Probability 32% Asset M Retum 11% 8% Normal Recession - 1% 49% 19% Print Asset N Return 22% 13% 2% Done Asset O Retum - 1% 8% 11% - X

Benefits of diversification Sally Rogers has decided to invest her wealth equally across the following three assets: a. What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset Malone? Hint. Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O. b. Could Sally reduce her total risk even more by using assets M and N only, assets M and O only, or assets N and O only? Use a 50/50 split between the asset pairs, and find the standard deviation of each asset pair. a. What is the expected return of investing equally in all three assets M, N, and O? % (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) States Boom Probability 32% Asset M Retum 11% 8% Normal Recession - 1% 49% 19% Print Asset N Return 22% 13% 2% Done Asset O Retum - 1% 8% 11% - X

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 16MC: When using the NPV method for a particular investment decision, if the present value of all cash...

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Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets. What are her expected returns and he risk from her investment in the three assets . How do they compare with investing in asset M alone. hint : Find he standard deviations of asset M and the portfolio equally invested in assets M, N, and O. Could Sally reduce her total risk even more by using assets M and O only, or assets N and O only. Use a 50/50 split between the asset pairs, and find the standard deviation of each asset pair. Please answer all questions with explanations and round to two decimal places. Thx
Sharon Smith, the financial manager for Barnett Corporation, wishes to select one of three prospective investments: X, Y, and Z. Assume that the measure of risk Sharon cares about is an asset's standard deviation. The expected returns and standard deviations of the investments are as follows: Investment Expected return Standard deviation X 17% 7% Y 17% 8% Z 17% 9% a. If Sharon were risk neutral, which investment would she select? Explain why. b. If she were risk averse, which investment would she select? Why? c. If she were risk seeking, which investments would she select? Why? d. Suppose a fourth investment, W, is available. It offers an expected return of 18%,and it has a standard deviation of 9%. If Sharon is risk averse, can you say which investment she will choose? Why or why not? Are there any investments that you are certain she will not choose?
Two assets, A and B, have the same expected return (10%) and the same level of risk (average). Which of the following statements is true? Select one: a. A rational investor will either put 100% of her funds into asset A or 100% of her funds into asset B because the return same but the investor will not have to track two separate investments. b. A combination of assets A and B will have the same expected return (10%) as either asset A or asset B, but may have less than average risk depending on how the cash flows from each asset move together. c. A rational investor is indifferent between investing 100% in A, 100% in B, or a combination of A and B, because the return and risk will be the same. d. A combination of assets A and B will result in the same expected return (10%) as investing 100% in A or 100% in B, but the risk will increase because now two investments are at risk.
From the sentences below, choose the one that DOES NOT fit in the concept of diversification. * An investor should investment her/his money in different types of securites because by doing so she/he will be able to create a compensation effect in which the less good performance of some investments can be compensated by the good performance of other investments. A portfolio constructed of different kinds of investments will, on average, have higher returns and a lower risk than any individual investment found within the portfolio. A very well diversified portfolio should be composed by different types of securities, from different sectors and from different geographical locations. Do not put all your eggs in one basket. In order to have the maximum return, an investor should invest all her/his money in the top 5 best stocks of the market.
Darren is considering the following investments; Alphabet, PayZero and FNQ Res.: Probability of return (%) Likely Return Alphabet (%) Likely Return PayZero (%) Likely Return FNQ Res. (%) 20 6 4 9 30 9 7 14 40 16 10 19 10 18 14 26 a) Calculate the expected return for each asset. b) Calculate the expected return on a portfolio comprising each asset weighted as follows Asset Weighting (%) Weighting (%) Alphabet 20 PayZero 55 FNQ Res. 25 c) Explain to Darren the benefit of combining the assets into a portfolio instead of undertaking individual investments in Alphabet, PayZero and FNQ Res. d) Calculate the risk attached to each of the investments proposed in Alphabet, PayZero and FNQ Res. Rank each investment in regard to its risk and return. Discuss the likely range of returns that could eventuate for each asset with a 95% level of accuracy.
Facing the question of whether to buy and hold an asset or whether to buy one asset rather than another, which of the following factors must be considered by an individual investor? A Investor's wealth. B Expected return on one asset relative to alternative assets. C Risk of one asset relative to alternative assets. D All of the above must be considered. Which of the following is correct about the expected return on a particular asset? Question 6 options: A If the asset's beta is 1.0, then the expected return on that asset is equal to the risk-free rate of return. B If the asset's beta is zero, then the expected return on that asset is greater than the risk-free rate of return. C If the asset's beta is zero, then the expected return on that asset is equal to the risk-free rate of return. D If the asset's beta is greater than 1.0, then the…
(Computing the standard deviation for an individual investment) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes: LOADING... . a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity? b. Calculate the standard deviation in the anticipated returns found in part a. c. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid expansion. State of Economy Probability Fund Returns Rapid expansion and recovery…
Benefits of diversification. What is the expected return of investing equally in all three assets M, N, and O? Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O.
Which of the following statements is true? Group of answer choices The Principle of Diversification states that investors are better off by investing in one asset. The Principle of Diversification states that investors are better off by investing in different types of assets. The Principle of Diversification states that investors are better off by investing in risk-free assets. The Principle of Diversification states that investors are better off by investing in an industry of their choice.
Investing is a risky business, so investors must be ready to accept that future investment cash flows may be uncertain and unpredictable. This being case, what is the best way to evaluate the value of such an investment? A. Determine the future value of the individual anticipated cash flows at a minimum acceptable rate of return B. Convert the individual future cash flows in a perpetuity and determine the present value of the perpetuity C. Convert the individual future cash flows into an annuity and determine the present value of the annuity D. Determine the present value of the individual anticipated cash flows at a minimum acceptable rate of return
As the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 8, while Mr. B has a risk-tolerance factor of 27. The characteristics for four model portfolios follow: ASSET MIX Portfolio Stock Bond ER σ2 1 6 % 94 % 9 % 6 % 2 25 75 10 10 3 67 33 11 14 4 88 12 12 24 Calculate the expected utility of each prospective portfolio for each of the two clients. Do not round intermediate calculations. Round your answers to two decimal places. Portfolio Ms. A Mr. B 1 2 3 4 Which portfolio represents the optimal strategic allocation for Ms. A? Which portfolio is optimal for Mr. B? Portfolio represents the optimal strategic allocation for Ms. A. Portfolio is the optimal allocation for Mr. B. For Ms. A, what level of…
as the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 9, while Mr. B has a risk-tolerance factor of 27. The characteristics for four model portfolios follow: ASSET MIX Portfolio Stock bond ER σ2 1 9% 91% 8% 5% 2 21 79 9 9 3 69 31 10 14 4 84 16 11 24 Calculate the expected utility of each prospective portfolio for each of the two clients. Do not round intermediate calculations. Round your answers to two decimal places. Portfolio Ms. A Mr. B 1 2 3 4