Chapter 21, Problem 16QA

​(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…

(Expected rate of​ return)  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.  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 15​%   100​%   Modest growth 35​%   30​%   Continued recession 35​%   10​%   Falls into depression 15​%   −100​%

You are International Business Manager at a UK based company. Considering high demand your company plans a full-scale expansion. Your company has identified USA and Europe as potential markets. You are requested to analyse both projects and advise. In considering such large project, you must work out the risk of each project, cost of capital and NPV. Allocate discount rate for each project accordingly and justify why you allocated this rate in your discussion. Discuss how international risks can be managed.   Projected cash flows in respective currencies: Year    Net Cash Flow – USD USA    Net Cash Flow - EUR Europe0    -20 million    -20 million 1    2 million    2 million2    4 million    3 million3    5 million    4 million4    6 million    8 million5    8 million    8 million Instructions:a.    Discuss viability of both projects in today’s global business context and allocate discount rate. b.    How much investment is needed for each project and what is the NPV of each project? c.…