There are two projects, A and B. the following probability distribution for the projects are given below A B Initial Investment $9,000 $9,000 Annual rate of return Return Prob. Return Prob. Pessimistic 9% 0.25 11% 0.30 Most Likely 15 0.50 18 0.45 Optimistic 25 0.25 23 0.25 a. Compute expected rate of return for each project. b. Compute variance and standard deviation of rate of return for each project. c. compute the coefficient of variance. Which project should you take? C.

There are two projects, A and B. the following probability distribution for the projects are given below A B Initial Investment $9,000 $9,000 Annual rate of return Return Prob. Return Prob. Pessimistic 9% 0.25 11% 0.30 Most Likely 15 0.50 18 0.45 Optimistic 25 0.25 23 0.25 a. Compute expected rate of return for each project. b. Compute variance and standard deviation of rate of return for each project. c. compute the coefficient of variance. Which project should you take? C.

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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Consider the information for assets A, B, and C below: Probability Return on A 0.2 0.4 0.4 State Boom Average Bust 0.3 0.2 0.1 Return on B Return on C 0.05 9.15 0.2 0.1 0.25 0.3 Consider Portfolio (Y) comprising 60% Asset A and 40% Asset C. What is the variance of portfolio Y™?
EXAMPLE: PORTFOLIO VARIANCE• Consider the following information on returnsand probabilities:▪ Invest 50% of your money in Asset A State Probability A B PortfolioBoom .4 30% -5% 12.5%Bust .6 -10% 25% 7.5%• What are the expected return and standarddeviation for each asset?• What are the expected return and standarddeviation for the portfolio?
Project A has expected return of K500,000 while project B has expected return of K100,000. The variances for A and B are K25, 000,000 and K1, 000,000 respectively. a) Compute the coefficient of variation for the two projects b) Which of the two projects is more risky? c) The risky cash flow for project D is K150,000 in perpetuity and the risk adjusted return is 15%. What are the certainty equivalent cash flows when the risk free rate is 10% d) Should project D be accepted if it costs K105,000?
Consider the following variance-covariance matrix for Security A, Security B, and the Market: Variance-Covariance Matrix A B Market A 0.562500 0.091875 0.028125 0.091875 0.122500 0.021000 B Market 0.028125 0.021000 0.022500 For the coming year, the Market Risk Premium is 5.5 percent and the risk-free rate is 2.0 percent. Determine the required return for Security A using both the Capital Market Line and the Security Market Line (CAPM). What is the (absolute) difference between these two required returns? 12.375% O 16.875% 20.625% Ⓒ 7.700% 6.300%
Pronto Email service has a beta of 0.95 and a cost of equity of 11.9 percent. The risk-free rate of return is 2.8 percent. The firm is currently considering a project that has a beta of 1.03 and a project life of 6 years. What discount rate should be assigned to this project? a. 13.33% b. 13.84% c. 12.67% d. 13.62%
Consider the information below, compute the expected return, variance, and standard deviation. Show the solution. Probability Return of Assets 25% .30 25% .050 25% .100 25% .280
A project under consideration has an internal rate of return of 14% and a beta of 0.6. The risk-free rate is 99%, and the expected rate of return on the market portfolio is 14%. a-1. Calculate the required return. Required return 96
Modigliani and Associates has forecasted the following payoffs from a project. Outcome Probability of Outcome Assumptions $0 20% pessimistic $3500 60% moderately successful $6000 20% optimistic What is the expected value of the outcome?
Compute the required rate of return using the CAPM and the following information: Beta = .85 Expected return on the market = 9% Risk-Free Rate = 1.50% a. 7.50% b. 7.88% C. 9% d. 1.50% e. 7.65%
Suppose you have a project that has a 0.6 chance of doubling your investment in a year and a 0.4 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.) Answer is complete but not entirely correct. 40.99 Standard deviation %
Assume that a project is expected to produce the following cash flows in each year, each periodic cash flow is independent of every other, and the risk-free rate is 6%: Period Expected Cash Flow Estimated Standard Deviation 0 -$2,000 $100 1 $1,000 $200 2 $2,000 $500Find the expected NPW as well as the variance of the NPW.
8. Modified Internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR. Consider the following situation: Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $400,000. The project's expected cash flows are: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 -200,000 425,000 475,000

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