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A firm wants to select one new research and development project. The following table summarizes six possibilities. Considering expected return and risk, which projects are good candidates? The firm believes it can earn 5.5% on a risk-free investment in government securities (labeled as Project F).
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- coefficient variation=.55 positive coeficient of correlation =.20 expected value=$1200 What does standard deviation equal?Yields Year TLS DI PFE WMT 20x5 12.00% 4.50% 5.80% 11.30% 20x6 13.30% 5.30% 5.70% 9.00% 20x7 10.20% 3.10% 5.90% 13.90% 20x8 9.30% 2.70% 4.50% 14.80% 20x9 8.60% 1.90% 6.30% 15.00% Correlations: CPP = Perfect positive correlation, CP = Perfect correlation, SC = No correlation, CN =Negative correlation, CPN = Perfect negative correlation TLS – DI= 0.996145099 = (CPP) DI – PFE= 0.005359947 = (SC) TLS – PFE= 0.08450695 = (CP) DI – WMT= -0.975050934 = (CPN) TLS – WMT= -0.986408221 = (CPN) PFE – WMT= -0.144303856 = (CN) b. Which three of the four stocks would you combine to build a diversified portfolio and why? It starts from the premise that there is an investment distribution in equal parts (33.3%) among the selected shares. c. Calculate the return, risk and coefficient of variation for the portfolio of three stocks selected in the previous exercise. It starts from the premise that there is an…What is the variance of the following returns? State probability return Boom .2 .75 normal .55 .25 recession .15 -.1 depression .1 -.5 a. .0413 b. .01239 c. .1944 d. .2601 e. .3519
- Part a State Pr(a) ra Pr(b) rb 1 0.2 10% 0.25 12% 2 0.6 15% 0.40 20% 3 0.2 20% 0.35 18% Given the probability distribution above, determine (Calculate) and compare the: Expected return (means) Variance Standard deviation Part b How important is risk to returns and what are the key elements that must be analyzed in this regard before an investment decision is made? Discuss in no more than 200 words.T-Bills Philips Pay-up Rubber-Made Market Index Mean 7.00% 16.90% 2.07% 19.60% 15.00% Variance 0.00% 5.50% 2.40% 3.60% 3.10% Standard deviation 0.00% 23.40% 15.60% 18.90% 17.70% coefficient of variation 0 0.32 1.18 0.18 0.21 Covariance with MP 0 0.04 -0.03 0.02 0.03 Beta 0 1.32 -0.88 0.74 1 CAPM return 7.00% 17.54% -0.02% 12.89% 15.00% Correleation with market index 0.9953 -0.9953 0.6894 1 Mean 7.00% 16.90% 2.07% 19.60% 15.00% Valuation Overvalued (CAPM Above Benchmark) Undervalued (CAPM Below Benchmark) Undervalued ( CAPM Below Benchmark) Fairly priced (Benchmark) Nature of stock Aggressive (Beta is above 1) Defensive (Beta is below 1) Defensive (Beta is above 1) Defensive (Beta is 1) C) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph10.7 Calculating Returns and Variability Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y: Returns Year X Y 1 12% 14% 2 24 29 3 -27 -33 4 14 17 5 19 37
- Market Data Return Standard Deviation Beta Market Data 0.120 0.200 1.000 Risk-Free Rate 0.025 0.000 0.000 Company Data A B C Alpha 0.015 0.020 -0.005 Beta 1.200 0.800 1.250 Residual standard deviation, σ(e) 0.105 0.195 0.067 Standard Deviation of Excess Return 0.245 0.235 0.210 Required: Using the data above, please solve for the Sharpe Ratio, Treynor's Measure, and Information Ratio. (Use cells A3 to D10 from the given information to complete this question. Negative answers should be input and displayed as a negative values. All other answers should be input and displayed as positive values.) Risk-Adjusted Performance Measures A B C Market Sharpe Ratio Treynor's Measure Information RatioCalculate the standard deviation for the following returns: Year 2017 2018 2019 2020 Return 12.03% -8.24% 1.34% 4.55% Group of answer choices 8.4% 8.1% 7.6% 7.3%Calculate : M2 measure T2 measure Information Ratio (appraisal ratio) Fund Average return Standard Deviation Beta coefficient Unsystematic Risk A 0.240 0.220 0.800 0.017 B 0.200 0.170 0.900 0.450 C 0.290 0.380 1.200 0.074 D 0.260 0.290 1.100 0.026 E 0.180 0.400 0.900 0.121 F 0.320 0.460 1.100 0.153 G 0.250 0.190 0.700 0.120 Market 0.220 0.180 1.000 0.000 Risk free return 0.050 0.000
- 1. Calculate the Expected Return and Risk measured in terms of standard deviation and Variance relating to the following information of a Investment avenue: Return in Percentage: -15-10-5+5+10+15 Probability:.10.15.20.20.25.10Market Data Return Standard Deviation Beta Market Data 0.120 0.200 1.000 Risk-Free Rate 0.025 0.000 0.000 Company Data A B C Alpha 0.015 0.020 -0.005 Beta 1.200 0.800 1.250 Residual standard deviation, σ(e) 0.105 0.195 0.067 Standard Deviation of Excess Return 0.245 0.235 0.210 Required: Using the data above, please solve for the Sharpe Ratio, Treynor's Measure, and Information Ratio.State ofEconomy Probabilityof State Return on AssetDin State Return on AssetEin State Return on AssetFin State Boom 0.35 0.060 0.310 0.25 Normal 0.50 0.060 0.180 0.20 Recession 0.15 0.060 -0.210 0.10 1. Calculate the standard deviation for each security.