CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196239
Author: Bodie
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 22, Problem 2CP
Your client says, “With the unrealized gains in my portfolio, I have almost saved enough money for my daughter to go to college in eight years, but educational costs keep going up.” Based on this statement alone, which one of the following appears to be least important to your client's investment policy?
a. Time horizon.
b.
c. Liquidity.
d. Taxes.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Sandra is considering investing in a company's stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the return on the investment.
Probability
Return
Boom
0.4
25.00%
Good
0.2
15.00%
Level
0.1
10.00%
Slump
0.3
-5.00%
Use the table of returns and probabilities above to determine the expected return on Sandra’s investment? (Round answer to 3 decimal places, e.g. 0.076.)
Expected return
1. The president of the Martin Company is considering two alternative invest-
ments, X and Y. If each investment is carried out, there are four possible
outcomes. The present value of net profit and probability of each outcome
follow:
Investment X
Investment Y
Net Present
Net Present
Outcome
Value
Probability Outcome
Value
$12 million
Probability
0.1
$20 million
0.2
A
8 million
10 million
2
0.3
B
9 million
0.3
3
0.4
6 million
0.1
3 million
0.1
D
11 million
0.5
a. What are the expected present value, standard deviation, and coefficient
of variation of investment X?
b. What are the expected present value, standard deviation, and coefficient
of variation of investment Y?
c. Which investment is riskier?
d. The president of the Martin Company has the utility function
Being Finance Manager of Salalah Textiles Industries, you need to invest an amount for OMR 50,000 in the investment market. Assume the market rate of return is 0.11, risk free rate of return is 2.75% and Beta is .73, then:Required:a) What should be required rate of return for your investment?b) Keeping the answer of question # 2a in mind, if different investment options are available with different returns in the investment market, for example:i. For investment in Project-A, 6.30% return is offered;ii. For investment in Project-B, 10.95% return is offered, andiii. For investment in Project-C, 5.65% return is offered.In above scenario, explain whether any why these investment options are overvalued or undervalued? Keeping the answer of question # 2a and 2b, what will be your investment decision (justify your answer with reasons)
Chapter 22 Solutions
CONNECT WITH LEARNSMART FOR BODIE: ESSE
Ch. 22 - Prob. 1PSCh. 22 - Prob. 1CPCh. 22 - Your client says, “With the unrealized gains in my...Ch. 22 - The aspect least likely to be included in the...Ch. 22 - Prob. 4CPCh. 22 - Prob. 5CPCh. 22 - Prob. 6CPCh. 22 - Which of the following statements reflects the...Ch. 22 - Prob. 8CPCh. 22 - Prob. 9CP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Being Finance Manager of Salalah Textiles Industries, you need to invest an amount for OMR 50,000 in the investment market. Assume the market rate of return is 0.11, risk free rate of return is 2.75% and Beta is .73, then:Required:a) What should be required rate of return for your investment?arrow_forwardDebra is considering investing in a company's stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the return on the investment.Use the following table of returns and probabilities to determine the coefficient of variation for the investment. (Round answer to 5 decimal places, e.g. 0.07680.) Probability Return Boom 0.2 25.00% Good 0.4 15.00% Level 0.3 10.00% Slump 0.1 -5.00%arrow_forwardAn investment advisor currently has two types of investments available for clients: a conservative investment A that pays 8% per year and investment B of higher risk that pays 14%. Clients may divide their investments between the two to achieve any total return desired between 8% and 14%. However, the higher the desired return, the higher the risk. How should each client listed in the table invest to achieve the desired return? Client 1 Client 2 Client 3 k $21000 $40000 $31000 k, Annual Return Desired $2460 $3860 $3740 k2 Total Investment How much money should Client 1 invest in each account to achieved the desired return? Amount in investment A: Amount in investment B: How much money should Client 2 invest in each account to achieved the desired return? Amount in investment A: Amount in investment B: How much money should Client 3 invest in each account to achieved the desired return? Amount in investment A: Amount in investment B:arrow_forward
- Please select the option that best analyzes the RETURN ON EQUITY for our example company. Return on equity tells us how well we have used our owners' investments to provide a return on their investment. Our investors require a return of 5%, so they would accept the return on equity for the year, since it is LESS than their return they accept to earn. Return on equity tells us how well we have used our owners' investments to provide a return on their investment. Our investors require a return of 5%, and they are content as the example company provided a return EQUAL to their expected return. Return on equity tells us how well we have used our owners' investments to provide a return on their investment. Our investors require a return of 5%, so they would accept the return on equity for the year. Return on equity tells us how well we have used our owners' investments to provide a return on their investment. Our investors require a return of 5%, so they would NOT ACCEPT the…arrow_forwardplease solve the task by reading attached picture of background knowledge Homework-1 Christine heard about Value Based Management and the Cost of Capital concept. She has not really an idea which profit is necessary. Please calculate the wacc for Christine with the following additional assumptions: - risk-free interest rate: 3%- Expected return for equity in this market segment: 10%- Tax rate: 35%- Christine has the feeling that the risk of her business is aboveaverage in this market sector. Calculate with a ß-factor on your own estimation.arrow_forward(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%arrow_forward
- Your accountant has conviced you that you should invest your bonus from this year into your retirement account-instead of buying a new sport car- because of the high expected return on the investment. Determine which of these fundamental factors is affecting the cost of money in the senario described. a. inflation b. Time prefernces for consumption c. Riskarrow_forward4. Present value Finding a present value is the reverse of finding a future value. is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future. Which of the following investments that pay will $19,000 in 14 years will have a higher price today? The security that earns an interest rate of 7.00%. The security that earns an interest rate of 10.50%. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric’s investment time horizon is flexible, which of the following investment options will exhibit the lower price? An investment that matures in five years An investment that matures in six years Which of the following is true about present value calculations? Other things remaining equal, the present value of a…arrow_forwardAn investment firm is considering two alternative investments, A and B, under two possible future sets of economic conditions, good and poor. There is a .60 probability of good economic conditions occurring and a .40 probability of poor economic conditions occurring. The expected gains and losses under each economic type of conditions are shown in the following table: Economic Conditions Investment Good Poor A $900,000 –$800,000 B 120,000 70,000 Using the expected value of each investment alternative, determine which should be selected.arrow_forward
- 1. If you perform a NPV analysis on a perspective investment using a "d" = 15% and: a. the NPV Is < 0, what can you tell me about the investment's IRR (time adjusted rate of return)? b. the NPV is > 0, what can you tell me about the investment's IRR (time adjusted rate of return)? c. the NPV is= 0, what can you tell me about the investment's IRR (time adjusted rate of return)? 2. We presume in Investment analysis that the payback method of evaluation is a better measure of.................than it is a measure of...................... We also think less of the payback method because it sometimes ignores the............., ..................of an investment since the................. the oftentimes occurs after the payback period has lapsed. 3. Please explain why we oftentimes equate EBITDA (earnings before subtracting] interest, taxes, depreciation & amortization) with NOI (net operating income) in examining business' profitability. Why don't…arrow_forwardSVR Clinical Research, LLC Mrs. Seaver, a microbiologist and pharmacist, has developed a drug therapy to treat dysphagia (swallowing problems). She discovered that a combination of existing drugs should address problems with swallowing that have only marginal treatments available to date. Since the therapy is using currently approved drugs, safety of the treatment is expected. It should allow the drug to enter Phase 2 clinical trials very soon after the firm raises its first $3 million in seed capital. Startup investors recognize that they are investing in firms with no history and with significant risk. They evaluate investment opportunities using required returns in the range of 10x5 (That is, the investors want to have their investment return to be 10 times great than the initial investment at the end of 5 years.) Mrs. Seaver's team has developed a clinical trial plan using major research medical centers such as the Vanderbilt University Medical Center and the Cleveland Clinic. The…arrow_forwardA4) Finance which of the following statements on consumption-based asset pricing are correct? 1. The power utility model predicts that the variance of consumption growth is positively related to the risk-free rate. 2. Assets that perform well when marginal utility is high should earn lower expected returns. 3. In the data, consumption growth is smooth with low standard deviation relative to stock returns. 4. In the data, the sharpe ratio of the market portfolio is about 50% per year. This implies the standard deviation of any valid stochastic discount factor that can explain the equity risk premium puzzle must be less than 50%arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
5 Steps to Setting Achievable Financial Goals | Brian Tracy; Author: Brian Tracy;https://www.youtube.com/watch?v=aXDuLxEJqBo;License: Standard Youtube License