State of the Economy Deep recession Mild recession Average Mild boom Strong boom Probability 0.05 0.25 0.35 0.20 0.15 Company A -20% 0 10 15 30 Company B -40% 10 0 25 30
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From the table given, how can I compute 1. the covariance of returns and 2. the correlation between Company A and B? Thanks!
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- level of retu State of Economy Probability .40 .30 .30 Asset A 30% Boom Normal Recession Asset B 20% 15% -10% 0% -20%(Related to Checkpoint 8.1) (Expected rate of return) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes: a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity? ► b. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid expansion. a. The expected rate of return from this investment opportunity is%. (Round to two decimal places)Problem 10-17 Expected Return Risk (LG10-1)Following are three economic states, their likelihoods, and the potential returns:Economic State Probability Return Fast growth 0.3 40 % Slow growth 0.4 10 Recession 0.3 –25 ________________________________________Determine the standard deviation of the expected return. (Do not round intermediate calculations and round your answer to 2 decimal places.)
- ← Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets: a. What are her expected returns 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.)Using the table below show and explain whether the two assets A and B are ideal for Hedging State of the world Probability Return A Return B Expansion 25% 32% 5% Normal 50% 14% 15% Recession 25% 4% 25%LO 5 Book Ms Based on the following information: State of Economy Depression Recession Normal Boom Probability of State of Economy 0.13 0.22 0.47 0.18 You received partial credit in the previous attempt. Rate of Return if State Occurs -0.108 0.056 0.127 0.208 Calculate the expected return. (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected return 9.54% Calculate the standard deviation. (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Standard deviation 5.58% m
- Problem 10-18 Expected Return Risk (LG10-1) Following are three economic states, their likelihoods, and the potential returns: Return 35% Economic State Fast growth Slow growth Recession 2 -18 Probability 0.25 0.45 0.30 Determine the standard deviation of the expected return. (Do not round intermediate calculations and round your answer to 2 decimal places.) Standard deviation %Reported Horiron Period S millions 2018 2019 2020 2021 2022 Terminal Period $14.768 $15454 $16591517,589 $18.644 2711 2880 9.462 10.028 10630 11268 11544 Sales S15017 NOPAT 3,053 3236 JA10 NCA 12.183 Answer the following requirements assuming a discount rate (WACC) of 735, a terminal period growth rate of 2% common shares outstanding of 328.1 miion, and net nonoperating obligations (NN0) of 16,204 million (al Estimate the value of a share of ITWS common stock using the discounted cash flow (DCF model as of December 31, 2018 Instructions: • Round all answers to the nearest whole number, except for discount factors, shares outstanding (do not roundi and stock price per share. Round discount factors to 5decimal.places • Round stock price per share to two decimalplaces Do not use negative signs with any of your answers Forecast Horizon 2021 Reported 2020 2022 Terminal Period (S milions) 2018 2019 increase in NOA FCFF INOPAT increase in NOA) Discount factor 1/ Present value of horuon FCFF…470 - 34 you have concluded that the following relationships are possible next year: economic status probability rate of return weak economy .15 -5% static economy .6 5% strong economy .25 15% What is your expected rate of return (E(RI)) for next year? a. 4.25% b 6% c. 6.25% d. 7.75% e. 8%
- The probability distribution of the returns of two assets, A and B, are shown in the table below. Calculate the covariance between the returns of asset A and asset B. State of Economy Probability of State Return of Asset A Return of Asset B Boom 0.20 40% 5% Normal 0.45 20% 10% Slow Down 0.25 0% 15% Recession 0.10 -20% 30% O-0.3750 -0.0114 0.3750 -50.2500 -2.525Year Cash Flow 0 −$8,200 1 2,500 2 4,100 3 3,900 What is the profitability index for the cash flows if the relevant discount rate is 10 percent? A. 1.079 B. 1.100 C. 0.995 D. 1.016 E. 1.048 What is the profitability index for the cash flows if the relevant discount rate is 16 percent? A. 0.939 B. 0.967 C. 0.986 D. 0.892 E. 0.911 What is the profitability index for the cash flows if the relevant discount rate is 26 percent? A. 0.795 B. 0.819 C. 0.834 D. 0.755 E. 0.771Spreadsheet Link What is the IRR of the following project?Cash FlowYear0 -32,0001. 9,0002. 10,0003. 15,0004. 7,800 1). 10.8% 2). 11.2% 3). 11.7%4). 12.0% 5). 12.3%