International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Use the following output from a market model regression of the weekly percentage returns on the AIG commodities index on a market index to answer questions a. - f.
a. What is the formula for the Commodities Index' characteristic line?
b. You forecast a market return of 1.0% for next week. What is next week's expected return for the commodities index?
c. What is the correlation between the return on the commodities index and the return on the market Index?
d. How much of the variation in the commodities index's returns are explained by the model?
e. Based on these regression results, the commodities index would be considered what kind of an investment?
f. Does this regression have much explanatory power? Why or why not?
Calculating Returns and Standard Deviations
Based on the following information, calculate the expected return andstandard deviation:
State of Economy
Probability of State of Economy
Rate of Return if State Occurs
Depression
.15
-.148
Recession
.30
.031
Normal
.45
.162
Boom
.10
.348
Based on the following information, what is the standard deviation of returns?
State of Economy
Probability of Stateof Economy
Rate of Return ifState Occurs
Recession
.28
−
.096
Normal
.41
.111
Boom
.31
.221
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- Based on the following information, what is the standard deviation of returns? State of Economy Probability of State of Economy Rate of Return if State Occurs Recession .22 −.090 Normal .47 .105 Boom .31 .215arrow_forwardQuantitative Problem: You are given the following probability distribution for CHC Enterprises: State of Economy Probability Rate of return Strong 0.25 18% Normal 0.45 8% Weak 0.30 -6% What is the stock's expected return? Do not round intermediate calculations. Round your answer to two decimal places. ? % What is the stock's standard deviation? Do not round intermediate calculations. Round your answer to two decimal places. ? % What is the stock's coefficient of variation? Do not round intermediate calculations. Round your answer to two decimal places. ?arrow_forwardSuppose you own an investment that had a total nominal return of 10.7% last year. If the inflation rate last year was 3.7%, what was your real return (in percent)? (Hint - think of economist Irving Fisher, how would Fisher have answered this question by doing an exact calculation?). . .arrow_forward
- Following are three economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast growth 0.24 33 % Slow growth 0.52 7 Recession 0.24 –40 Determine the standard deviation of the expected return. (Do not round intermediate calculations and round your answer to 2 decimal places.)arrow_forwardConsider the following information about the various states of economy and the returns ofvarious investment alternatives for each scenario. Answer the questions that follow. % Return on T-Bills, Stocks and Market Index State of the Economy Probability T- Phillips Pay- Rubber- Market Bills up made Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29…arrow_forwardConsider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. % Return on T-Bills, Stocks and Market Index State of the Economy Probability T- Phillips Pay- Rubber- Market Bills up made Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15…arrow_forward
- Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 2.00% per year. What is the real risk-free rate of return, r*? The cross-product term should be considered , i.e., if averaging is required, use the geometric average. (Round your final answer to 2 decimal places.)arrow_forwardConsider the following scenario analysis: Rate of Return Scenario Probability Stocks Bonds Recession 0.30 −5 % 18 % Normal economy 0.60 19 % 7 % Boom 0.10 24 % 7 % b. Calculate the expected rate of return and standard deviation for each investment.arrow_forwardConsider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. % Return on T-Bills, Stocks and Market Index States of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean 7 16.9 20.7 19.6 15 Variance (%) ^2 0 549.09 244.124 358.04 313.6 Standard Deviation 0 23.4326695 15.6244712 18.92194493 17.7087549 Coefficient of Variation 0 1.386548491 7.54805372 0.965405354 1.18058366 Covariance wit MP 0 4.13 -275 231 313.60 Correlation with Market Index 0.9953 -0.9953 0.6894 1.0000 Beta 0 1.32…arrow_forward
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