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- Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Assume that an individual investor wants to select one market segment for a new investment. A forecast shows improving to declining economic conditions with the following probabilities: improving (0.2), stable (0.5), and declining (0.3). What is the preferred market segment for the investor, and what is the expected return percentage? At a later date, a revised forecast shows a potential for an improvement in economic conditions. New probabilities are as follows: improving (0.4), stable (0.4), and declining (0.2). What is the preferred market segment for the investor based on these new probabilities? What is the expected return percentage?arrow_forwardrate of return, standard deviation, and coefficient of variation. you have heard about the great returns that some private equity funds generate and have decided to evaluate blackrock inc and kkk & co inc. the table below provides 13 months of historical prices for each company. assume that neither company paid a dividend during this period calculate the monthly rate of return for each stock a. calculate the monthly rate of return for each stock. b. calculate the average monthly return for each stock. c. calculate the standard deviation of monthly returns for each stock d. based on parts b and c, determine the coefficient of variations for each stock. month blk stock price kkk stock price may 20 $485.80 $24.37 apr 20 502.04 25.21 mar 20 436.66 23.47 feb20 459.52 28.49 jan 20 523.38…arrow_forwardCostco (NASDAQ: COST) proving its strength as a consumer staples stalwart and has seen its share price strongly outperform the S&P 500 over the last month. Suppose you have purchased a Costco stock, which type of option should be chosen for hedging? Based on the option you selected, choose the appropriate strike price to calculate the option price, assuming the Costco is on a non-dividend-paying stock and the current stock price and strike price are given in the question, the risk-free interest rate is 3% per annum, the volatility is 30% per annum, and the time to maturity is four months.arrow_forward
- Investment Performance. It seems that every month we read an article in The Wall Street Journal about a stock picker with a marvelous track record. Do these examples mean that financial markets are not efficient?arrow_forward3) An investor is considering to take a short position in the CIB stock. After analyzing the market to take a decision the investor found the average daily trading on CIB to be 2,640 while the long trade positions are 1,082. Should the investor go ahead with this short sale or not? Support your answer quantitatively and with an explanationarrow_forwardUnder/Over Valued Stock A manager believes his firm will earn a 11.20 percent return next year. His firm has a beta of 1.38, the expected return on the market is 8.8 percent, and the risk-free rate is 3.8 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued. Multiple Choice A. 10.70%, over-valued B. 10.70%, under-valued C, 15.944%, over-valued D. 15.944%, under-valuedarrow_forward
- Scotto Manufacturing is a mature firm in the machine tool component industry. The firm’s most recent common stock dividend was $3.40 per share. Because of its maturity as well as its stable sales and earnings, the firm’s management feels that dividends will remain at the current level for the foreseeable future. a. If the required return is 12%, what will be the value of Scotto’s common stock? b. If the firm’s risk as perceived by market participants suddenly increases, causing the required return to rise to 5%, what will be the common stock value? c. Judging on the basis of your findings in parts a and b, what impact does risk have on value? Explain.arrow_forwardAssume that your cousin holds just one stock, Eastman Chemical Bonding (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for Wilder's Creations and Buildings (WCB). Both companies have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would your cousin's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.) Year ECB WCB 2011 40.00% 40.00% 2012 −10.00% 15.00% 2013 35.00% −5.00% 2014 −5.00% −10.00% 2015 15.00% 35.00% Average return = 15.00% 15.00% Standard deviation = 22.64% 22.64% a. 3.29% b. 3.46% c. 3.65% d. 3.84% e. 4.03%arrow_forwardAlthough investing all at once works best when stock prices are rising, dollar-cost averaging can be a good way to take advantage of a fluctuating market. Dollar-cost averaging is an investment strategy designed to reduce volatility in which securities are purchased in fixed dollar amounts at regular intervals regardless of what direction the market is moving. This strategy is also called the constant dollar plan. You are considering a hypothetical $1,200 investment in a media company's stock. Your choice is to invest the money all at once or dollar-cost average at the rate of $100 per month for one year. Assume that the company allows you to purchase "fractional" shares of its stock. (a) If you invested all of the money in January and bought the shares for $12 each, how many shares could you buy? shares (b)From the following chart of share prices, calculate the number of shares that would be purchased each month using dollar-cost averaging and the total shares for the year.…arrow_forward
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