Benefits of diversification Sally Rogers has decided to invest her wealth equally across the following three assets: a. What are her expected retums and the risk from her investment in the three assets? How do they compare with investing in asset M alone? Hint Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O. b. Could Sally reduce her total risk even more by using assets M and N only, assets M and O only, or assets N and O only? Use a 50/50 split between the asset pairs, and find the standard deviation of each asset pair. a. What is the expected return of investing equally in all three assets M. N. and O? % (Round to two decimal places)

Benefits of diversification Sally Rogers has decided to invest her wealth equally across the following three assets: a. What are her expected retums and the risk from her investment in the three assets? How do they compare with investing in asset M alone? Hint Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O. b. Could Sally reduce her total risk even more by using assets M and N only, assets M and O only, or assets N and O only? Use a 50/50 split between the asset pairs, and find the standard deviation of each asset pair. a. What is the expected return of investing equally in all three assets M. N. and O? % (Round to two decimal places)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets: . What are her expected returns and the risk from her investment in the three assets? How do th with investing in asset M alone? Hint Find the standard deviations of asset M and of the portfolio equally invested insets M, N, and O. What is the expected return of investing equally in all three assets M, N, and O? |% (Round to two decimal places.) i %3D Data Table (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability Asset M Return Asset N Return Asset O Return Boom 32% 13% 22% 5% Normal 53% 11% 15% 11% Recession 15% 5% 2% 13% Print Done
When considering the time value of money in making an investment decision, an investor would purchase a property when: I. Present Value < purchase price II. IRR (Internal Rate of Return) < discount rate (investor’s required return) A: I only B: II only C: both I and II D: neither I nor II
Mike Riskless is considering two projects. He has estimated the IRR for each under three possible scenarios and assigned probabilities of occurrence to each scenario. State of Economy Probability Estimated BTIRR Investment I Estimated BTIRR Investment II Optimistic 0.20 0.15 0.20 Most likely 0.60 0.10 0.15 Pessimistic 0.20 0.05 0.05 1.00 Riskless is aware that the pattern of returns for Investment II looks very attractive relative to Investment I; however, he believes that Investment II could be more risky than Investment I. He would like to compare the two investments considering both the risk and return on each. Required: a. Compute BTIRR under each of the three possible scenarios. b. Compute variance and standard deviation of the IRRs.
Suppose an investment has conventional cash flows with positive NPV. how would it impact your decision based on capital budgeting techniques mentioned below? 1.profitability index 2.internal rate of return 3.payback period
What is the process of consideration of the payback period?
Time value of money question: Envision you are approached with an investment opportunity. You aregiven two alternatives to choose from. Investment A has a higher interest rate than Investment B.Investment A requires a greater number of periods until you receive the benefit than Investment B. Applying concepts from the PV = FV/(1+r)^n (the NPV formula and discounting) describe the process ofhow you would decide which investment option would be better to invest in. Discussing how changes inboth the interest rate and the number of periods would affect this decision will help.
The benefits of CSR investments? a.must be evaluated qualitatively for the projects that cannot be evaluated quantitatively b.cannot be evaluated qualitatively c.must be evaluated using all three aspects of the triple bottom line d.are always easy to measure quantitatively
We learn there are three primary methods used to analyze capital investment proposals. Please compare and contrast these three methods. Be sure to include strengths (benefits) and weaknesses (drawbacks) of each. Three primary methods are: Payback method Internal rate of return Net present value.
Consider two possible investments whose payoffs are completely independent of one another. Both investments have the same expected value and standard deviation. If you have $1,000 to invest, could you benefit from dividing your funds between these investments? Explain your answer. a) Yes. By dividing your funds, you are adding combinations of possible payoffs that lie between the worst- and best-case scenarios and so the probability-weighted spread of the possible payoffs is smaller. The variance of the payoffs is halved. b) Yes. Because one investment will always pay off when the other doesn't, your risk is reduced. c) No. Because the payoffs from these investments are independent and not negatively correlated, there is no benefit. d) No. Usually diversification helps to spread risk, but in this case, because the investments have the same expected value and standard deviation there is no benefit.
Combining two or more assets in an investment portfolio will typically lead to diversification benefits.(i) What is the benefit of diversification?(ii) What is the general condition under which diversification will have benefits? Briefly explain why.
Which of the following statements is true? Multiple Choice When NPV is 0, the IRR is equal to the discount rate. When NPV is 0, the investment is not making a profit. In calculating IRR, we make the assumption all cash flows are reinvested at the discount rate. NPV is a good measure to use when comparing investments of different sizes.
An investor is consider four different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below. Economic Condition Investment Poor Average Good Excellent (S1) (S2) (S3) (S4) A 50 75 20 30 B 80 15 40 50 C -100 300 -50 10 D 25 25 25 25 What decision would be made under minimax regret?

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