Essentials Of Investments
11th Edition
ISBN: 9781260316193
Author: Bodie
Publisher: MCG
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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.
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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
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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
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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
Essentials Of Investments
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
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