week five assignment - Running Head FINANCE PLANNING...

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Running Head: FINANCE PLANNINGFinance PlanningMariea Pack-ElderFin-650
2Running Head: FINANCE PLANNINGDefinition of investment return and best case I would like to achieve to my clientInvestment return is measured by an investment's financial results. The returns may be in form of either dollar terms or percentage terms. Given the task bestowed upon me by my client, the best case I will like to achieve to my client is enabling her invest in a portfolio of diversified risk so as to be with some substantial degree of confidence of earning.The return on an investment that cost $1000and sold after one year for $1,100The dollar return is equivalent $1,100 - $1,000 = $100.The percentage return is equivalent to $100/$1,000 = 0.10 = 10%.Rationale on T-bills and risk free returnsThe 8% returns of T-bill are not dependent on the state of the economy since the Treasury is under an obligation of redeeming the bills at par with no regards to the economic state. In the default risk sense, T-bills are risk-free as the 8% return will be realized in all possible states of the economy. It is worthy keeping in mind that this return is made up of the real risk-free rate; say 3 percent, in addition to an inflation premium, say 5 percent. Because inflation is not certain,the probability the realized real rate of return would equal the expected 3% is low. For example, suppose inflation is 7% on average over the year, then the real rate of return realized would only be 8% less 7% which gives 1%, not 3% as expected. Thus, T-bills are not riskless regarding purchasing power.Also, if the rates decline after you have invested in a portfolio of T-bills, your nominal income would also decline; that is to say, T-bills are exposed to reinvestment rate risk. Hence, we summarize that risk free securities do not actually in the U.S. The Treasury would be truly
3Running Head: FINANCE PLANNINGriskless if it sold inflation-indexed, tax-exempt bonds; however, all actual securities are exposed to some risk.Why Alta Ind.’s returns are expected to move with the economy whereas Repo Men’s are expected to move counter the economy.The returns of Alta Industries are correlated positively with the economy since they move with an economy. The effect is the realist because the firm’s sales, same as its profits, will experience the same type of tides as the economy. Alta industries will flourish if the economy is booming. Repo Men, on the other hand, is seen as a hedge against economic recession and bad times by many investors. In that respect, investors in a stock market that have crashed should do relativelywell. Thus Repo Men stock is thus negatively correlated with the economy, that is, it moves counter. However, there is no stock which moves against the economy, in reality, even Repo Menshares are cheap, positively correlated with the market.Table 1 portfolio profile;Expected returnsThe expression of expected rate of return is:In this case;p_i Represents probability of occurrence of the i^thstate, r_i Represents the estimated rate of return for that state
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