Sandra is considering investing in a company's stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the return on the investment. Probability Return Boom 0.4 25.00% Good 0.2 15.00% Level 0.1 10.00% Slump 0.3 -5.00% Use the table of returns and probabilities above to determine the expected return on Sandra’s investment? (Round answer to 3 decimal places, e.g. 0.076.) Expected return

Sandra is considering investing in a company's stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the return on the investment. Probability Return Boom 0.4 25.00% Good 0.2 15.00% Level 0.1 10.00% Slump 0.3 -5.00% Use the table of returns and probabilities above to determine the expected return on Sandra’s investment? (Round answer to 3 decimal places, e.g. 0.076.) Expected return

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter15: Financial Statement Analysis

Section: Chapter Questions

Problem 12DQ

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Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Assume that an individual investor wants to select one market segment for a new investment. A forecast shows improving to declining economic conditions with the following probabilities: improving (0.2), stable (0.5), and declining (0.3). What is the preferred market segment for the investor, and what is the expected return percentage? At a later date, a revised forecast shows a potential for an improvement in economic conditions. New probabilities are as follows: improving (0.4), stable (0.4), and declining (0.2). What is the preferred market segment for the investor based on these new probabilities? What is the expected return percentage?
According to Wald's criterion, which investment is decided by looking at the profitability of three investments such as S1, S2 and S3 in the following economic environments? Economic Conditions S1 S2 S3 Vivid Economic Situation 13 6 7 Normal Economic Condition 10 9 8 Stagnant Economic Condition 7 14 4 Recession Condition 8 7 15
Management has constructed the below table of estimates reflecting the possible returns and probabilities for pessimistic, most likely and optimistic results. Possible outcomes probability return(n$) Pessimistic 0.4 14.00 Most likely 0.2 34.00 Optimistic 0.4 6.00 a) Determine the expected value of return for the above company b) What is the risk involved if the company chooses to invest in the above opportunity?
Ahsan, an individual investor, is evaluating the investment opportunity. To evaluate this investment, he collected the relevant data and has estimated the following result and their likelihood (probability). There are three possible results and each of them will generate a different return. Outcome Probability Rate of Return A 30% 50% B. 50% 30% 20% 70% a. Calculate the expected rate of return for the investor. b. What is the importance/relevance of expected rate of return? Answer:
“In investing, risk and return are highly correlated. Increased potential returnson investment usually go hand-in-hand with increased risk”. Critically evaluatethe above statement.ii A Financial Analyst is analyzing two investment alternatives Y and Z. Theirrates of returns under different probabilities are as follows.Probability Rate of ReturnY Z0.2 22% 5%0.6 14% 15%0.2 -4% 25%a. For Y and Z, calculate expected return, variance and standard deviation.b. Calculate the coefficient of variation for both stocks.c. If you are an investor, which company you would select for theinvestment.
Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible circumstances. To compute an asset’s expected return under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: Aaron owns a two-stock portfolio that invests in Happy Dog Soap Company (HDS) and Black Sheep Broadcasting (BSB). Three-quarters of Aaron’s portfolio value consists of HDS’s shares, and the balance consists of BSB’s shares. Each stock’s expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence Happy Dog Soap Black Sheep Broadcasting Strong 0.50 30% 42% Normal 0.25 18% 24% Weak 0.25 -24% -30%…
Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible circumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: Ethan owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of Ethan's portfolio value consists of FF's shares, and the balance consists of PP's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Strong Normal Probability of Occurrence 0.50 0.25 Falcon Freight Pheasant Pharmaceuticals 27.5% 38.5% 16.5% 22% Weak 0.25 -22% -27.5% Calculate expected…
Jill believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? Economic Conditions Strong Normal Weak 19.55% 18.98% 19.37% 18.62% Probability 30% 40% 30% Return 34.0% 10.0% -15.0%
Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible circumstances. To compute an asset’s expected return under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: Tyler owns a two-stock portfolio that invests in Celestial Crane Cosmetics Company (CCC) and Lumbering Ox Truckmakers (LOT). Three-quarters of Tyler’s portfolio value consists of CCC’s shares, and the balance consists of LOT’s shares. Each stock’s expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence Celestial Crane Cosmetics Lumbering Ox Truckmakers Strong 0.20 35% 49% Normal 0.35 21% 28%…
Consider the following information about the various states of the economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. Question 1 Fill in the parts in the above table that are empty. Using the data generated in the previous question (Question 1); Plot the Security Market Line (SML) 2. Superimpose the CAPM’s required return on the SML % Return on T-Bills, Stocks, and Market Index State of the Economy Probability T- Bills Phillips Pay- up Rubber- made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean Standard Deviation Coefficient of Variation Covariance with MP…
Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. Work out the Covariance with mp showing detatiled working and explanation % Return on T-Bills, Stocks and Market Index States of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean 7 16.9 20.7 19.6 15 Variance (%) ^2 0 549.09 244.124 358.04 313.6 Standard Deviation 0 23.4326695 15.6244712 18.92194493 17.7087549 Coefficient of Variation 0 1.386548491 7.54805372 0.965405354 1.18058366 Covariance wit MP Correlation with Market Index…
You were offered 2 investment opportunities, Stock M and Stock D. Your decision as to which investment to take will be based on the results of the comparative Expected Rate of Return using the following data: Stock M Return is 9.6% and Beta is 0.95 while Stock D Return is 8.7% and Beta is 1.2. A risk free return in the market, as measured by the return on government stock is 5.6%. *