Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
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Chapter 8, Problem 8.2WUE
Summary Introduction
To discuss:
Expected return
Introduction:
Return: In financial context, return is seen as percentage that represents the profit in an investment.
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Suppose You have decided to invest 40% of
your wealth in Company A which has an
expected return of 15% and a standard
deviation of 15%, and 60% of your wealth in
Company B which has an expected return of
9% and a standard deviation of 14%. If you
wanted an expected return of 13%, what
percentage should you invest in Company A?
Select one:
a. 50%
b. 67%
c. 13%
d. 30%
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Four analysts cover the stock of Fluorine Chemical. One forecasts a 5% return for the coming year. The second expects the return to be -5%. The third predicts a
return of 9%. The fourth expects a 1% return in the coming year. You are relatively confident that the return will be positive but not large, so you arbitrarily assign
probabilities of being correct of 34%, 6%, 16%, and 44%, respectively, to the analysts' forecasts. Given these probabilities, what is Fluorine Chemical's expected return
for the coming year?
nents
Fluorine Chemical's expected return for the coming year is
%. (Round to two decimal places.)
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Suppose that you are working as a financial analyst in an investment bank. Your client is seeking your advice to invest in either Stock A or
Stock B given the market conditions in the coming year. Stock A is expected to yield a return of 35% if the market experiences a boom and a
return of 5% if the market experiences a bust. Stock B is expected to yield a return of 65% if the market experiences a boom and a return of 15%
if the market experiences a bust. According to your estimates, there is a 60% probability that the market will experience a boom and a 40%
probability that the market will experience a bust.
Calculate the expected return for each stock. Which stock would you advise your client to invest in if her/her objective is to
maximize returns regardless of the level of risk?
Chapter 8 Solutions
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Ch. 8.1 - Prob. 1FOECh. 8.1 - What is risk in the context of financial decision...Ch. 8.1 - Prob. 8.2RQCh. 8.1 - Prob. 8.3RQCh. 8.2 - Explain how the range is used in scenario...Ch. 8.2 - Prob. 8.5RQCh. 8.2 - Prob. 8.6RQCh. 8.2 - What does the coefficient of variation reveal...Ch. 8.3 - What is an efficient portfolio? How can the return...Ch. 8.3 - Prob. 8.9RQ
Ch. 8.3 - How does international diversification enhance...Ch. 8.4 - Prob. 8.11RQCh. 8.4 - Prob. 8.12RQCh. 8.4 - Prob. 8.13RQCh. 8.4 - What impact would the following changes have on...Ch. 8 - Prob. 1ORCh. 8 - Prob. 8.1STPCh. 8 - Prob. 8.2STPCh. 8 - Prob. 8.1WUECh. 8 - Prob. 8.2WUECh. 8 - Prob. 8.3WUECh. 8 - Prob. 8.4WUECh. 8 - Prob. 8.5WUECh. 8 - Prob. 8.6WUECh. 8 - Prob. 8.1PCh. 8 - Prob. 8.2PCh. 8 - Prob. 8.3PCh. 8 - Prob. 8.4PCh. 8 - Prob. 8.5PCh. 8 - Learning Goal 2 P8-6 Bar charts and risk Swans...Ch. 8 - Prob. 8.7PCh. 8 - Prob. 8.8PCh. 8 - Prob. 8.9PCh. 8 - Prob. 8.10PCh. 8 - Prob. 8.11PCh. 8 - Prob. 8.12PCh. 8 - Prob. 8.13PCh. 8 - Prob. 8.14PCh. 8 - Learning Goal 4 P8- 15 Correlation, risk, and...Ch. 8 - Prob. 8.16PCh. 8 - Learning Goal 5 P8- 17 Total, nondiversifiable,...Ch. 8 - Prob. 8.18PCh. 8 - Prob. 8.19PCh. 8 - Prob. 8.20PCh. 8 - Prob. 8.21PCh. 8 - Prob. 8.22PCh. 8 - Prob. 8.23PCh. 8 - Prob. 8.24PCh. 8 - Prob. 8.25PCh. 8 - Prob. 8.26PCh. 8 - Prob. 8.27PCh. 8 - Learning Goal 6 P8- 28 Security market line (SML)...Ch. 8 - Prob. 8.29PCh. 8 - Prob. 8.30PCh. 8 - Prob. 8.31PCh. 8 - Prob. 1SE
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