Estimated rate of returns T- Pak Market State of the Probability Blls Nescom Nawab PK_Steel portfolio Recession 0.1 3% -14.25 12.25 1.75 -9.75 Below average 0.2 3% -4.75 5.25 -8.25 -2.75 average 0.4 3% 6.25 -0.5 0.25 3.75 Above average 0.2 3% 13.75 -2.5 19.25 11.25 Вoom 0.1 3% 21.25 -10 11.75 17.75 Expectred Returns St. Deviation Cy 0%
Estimated rate of returns T- Pak Market State of the Probability Blls Nescom Nawab PK_Steel portfolio Recession 0.1 3% -14.25 12.25 1.75 -9.75 Below average 0.2 3% -4.75 5.25 -8.25 -2.75 average 0.4 3% 6.25 -0.5 0.25 3.75 Above average 0.2 3% 13.75 -2.5 19.25 11.25 Вoom 0.1 3% 21.25 -10 11.75 17.75 Expectred Returns St. Deviation Cy 0%
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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Question
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Mini Project
Assume that after completion of your MBA you have started working as a financial
planner at JS Capital Limited. In a second week of Job you have got assignment to
invest Rupees 100,000 for a client. Because the funds are to be invested in a business
at the end of 1 year, you have been instructed to plan for a 1-year holding period.
Moreover, your manager has restricted you to the investment alternatives in the
following table, shown with their probabilities and associated outcomes. (For now,
disregard the items at the bottom of the data; you will fill in the blanks later.)
Estimated rate of returns
T-
Pak Market
State of the
Probability
Bills
Nescom Nawab PK_Steel portfolio
Recession
0.1
3%
-14.25
12.25
1.75
-9.75
Below average
0.2
3%
-4.75
5.25
-8.25
-2.75
average
0.4
3%
6.25
-0.5
0.25
3.75
Above average
0.2
3%
13.75
-2.5
19.25
11.25
Вoom
0.1
3%
21.25
-10
11.75
17.75
Expectred Returns
St. Deviation
0%
CV
Beta
JS Capital staff has estimated the probability values for the state of the economy, and
also estimated the corresponding rate of return on each alternative under each state of
the economy. Nescom. is technology firm, Nawab collects past-due debts, and PK_Steel
manufactures steel products. JS capital also maintains a "market portfolio" that owns a
market-weighted fraction of all publicly traded stocks on Pakistan exchange market; you
can invest in that portfolio and thus obtain average stock market results. Given the
situation described, answer the following questions:
1. Why is the T-bill's return independent of the state of the economy? Do T-bills
promise a completely risk-free return? Explain?
2. Why are Nescom returns expected to move with the economy, whereas Nawab's
are expected to move counter to the economy?
Calculate the expected rate of return on each alternative.
Select: 87 ould recognize that basing a decision solely on expected returns is
iate only for risk neutral individuals. Your client is risk-averse, the
riskiness of each alternative is an important aspect of the decision. One possible
Aa
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4. You should recognize that basing a decision solely on expected returns is
appropriate only for risk neutral individuals. Your client is risk-averse, the
riskiness of each alternative is an important aspect of the decision. One possible
measure of risk is the standard deviation of returns. Calculate this value for
each alternative.
5. What type of risk is measured by the standard deviation?
6. Suppose you suddenly remembered that the coefficient of variation (CV) is
generally regarded as being a better measure of stand-alone risk than the
standard deviation when the alternatives being considered have widely differing
expected returns. Calculate the CVs and interpret the results.
7. Suppose you created a two-stock portfolio by investing Rupees 50,000 in
Nescom and Rupees 50,000 in Nawab. Now Calculate the expected return of
portfolio, the standard deviation of portfolio and the coefficient of variation of
portfolio. Also write about how the riskiness of this two-stock portfolio
compares with the riskiness of the individual stocks if they were held in isolation?
8. Assume that the expected rates of return and the beta coefficients of the
alternatives supplied by an independent analyst are as follows:
Estimated rate of
Security
returns
Beta
Nescom
5%
1.5
Market
4
1
Pk_Steel
3.5
0.75
T_Bills
3
Nawab
1
-0.6
What is a beta coefficient, and how are betas used in risk analysis?
Do the expected returns appear to be related to each alternative's market risk?
Is it possible to choose among the alternatives on the basis of the information
developed thus far?
9. Assumes that the risk-free rate is 3.0%, and risk premium is expected return on
market portfolio less risk.
Write out the security
line (SML) equation; use
to calculate the
required rate of return on each alternative?
Full text: 5287
the expected rates of return compare with the required rates of
return? Identify the undervalued companies?
Aa
ill
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