Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 2, Problem 6E
To determine
The riskier investment on the basis of expected returns and standard deviation of returns.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
John has an investment budget of £20,000. In addition, he has borrowed £10,000 at a fixed interest rate of 5%. He decides to invest all available funds in a portfolio of equities which has an expected rate of return of 12% and standard deviation of 20%. What is the standard deviation of the return on John’s overall investment portfolio?
You plan to invest $1,000 in a corporate bond fund or in a common stock fund. The following table represents the annual return (per $1,000) of each of these investments under various economic conditions and the probability that each of those economic conditions will occur.
Compute the expected return for the corporate bond and for the common stock fund. Show your calculations on excel for expected returns.
Compute the standard deviation for the corporate bond fund and for the common stock fund.
Would you invest in the corporate bond fund or the common stock fund? Explain.
If choose to invest in the common stock fund and in (c), what do you think about the possibility of losing $999 of every $1,000 invested if there is depression. Explain.
Studies have concluded that a college degree is a very good investment. Suppose that a college graduate earns about 75% more money per hour than a high-school graduate. If the lifetime earnings of a high-school graduate average $1,200,000, what is the expected value of earning a college degree?
Chapter 2 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
Knowledge Booster
Similar questions
- Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both Stocks A and C, and 30 percent in Stock B? (see attached chart)arrow_forwardQUESTION 1 Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. Compute the standard deviation of the returns on the portfolio assuming that the two stocks' returns are uncorrelated. 17.4%. 27.4%. 7.4%. 11.4%. QUESTION 2 Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases. The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases. The standard deviation of the portfolio returns increases as the coefficient…arrow_forwardSuppose you’re evaluating a new project costing 125 and yielding an expected payoff of 75 for the two subsequent years. You know that the market(portfolio) rate is 0,10 that the covariance of the new investment’s payoff with the market portfolio is 0,2 and that the variance of the market payoff is 0,1. You also know that the risk-free rate is 0,05. Would you accept the project if you do not account for the risk embodied in the new project? Why? What if you probably accounted for risk, by using CAPM?arrow_forward
- A risk-averse manager is considering two projects. The first project involves expanding the market for bologna; the second involves expanding the market for caviar. There is a 10 percent chance of a recession and a 90 percent chance of an economic boom. During a boom, the bologna project will lose $10,000, whereas the caviar project will earn $20,000. During a recession, the bologna project will earn $12,000 and the caviar project will lose $8,000. If the alternative is earning $3,000 on a safe asset (say, a Treasury bill), what should the manager do? Why?arrow_forwardFind the expected value assuming the risk factor is 30 % and the interest rate is 15%, if you will receive $20,000 one year from today. Find the expected value assuming the risk factor is 30 % and the interest rate is 15%, if you will receive $20,000 two years from today.arrow_forwardYou are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the accompanying table. Project Boom (50%) Recession (50%) A $ 20 −$ 10 B −$ 10 $ 20 C $ 30 −$ 30 D $ 50 −$ 50 The variance in the returns of project D is Multiple Choice 1,600. 225. 900. 0.arrow_forward
- Consider the two options in the following table, both of which have random outcomes: a. Determine the expected value of each option. b. Determine the variance and standard deviation of each option. c. Which option is most risky?arrow_forwardThe following payoff table provides profits based on various posible decision alternativesand various levels of demand at Kmart Print Shop. Alternatives Low High Alternative 1 10,000 30,000 Alternative 2 5,000 40,000 Alternative 3 -2,000 50,000 The probability of low demand is 0.4, whereas the probability of high demand is 0.6.What is the highest possible expected monetary value?arrow_forwardTwo stocks are available. The corresponding expectedrates of return are r¯1 and r¯2; the corresponding variances and covariances areσ12, σ22, and σ12. What percentages of total investment should be invested ineach of the two stocks to minimize the total variance of the rate of return ofthe resulting portfolio? What is the mean rate of return of this portfolio?arrow_forward
- Stock H has a beta of 1.6, while Stock L has a beta of 0.7. If investors’ aversion to risk increased... a. the risk premiums of Stock H and L would increase by the same amount. b. the risk premium of Stock L would increase by more. c. the risk premiums of Stock H and L would remain unchanged. d. the risk premium of Stock H would increase by more.arrow_forwardExplain why the variance of an investment is a useful measure of the risk associated with itarrow_forwardRice farming is risky and generates expected income of $100. The certainty equivalent associated with rice farming will be greater than $100 for a risk averse individual and less than $100 for a risk loving individual. True or Falsearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial Economics: Applications, Strategies an...EconomicsISBN:9781305506381Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. HarrisPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics: Applications, Strategies an...
Economics
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning