Mini case - Mini Case State of the Alta Repo American...

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Mini Case State of the Alta Repo American Market 2 Stock Economy ProbabilityT-Bills Industries Men Foam Portfolio Portfolio Recession 0.1000 8.00% -22.00% 28.00% 10.00% -13.00% 3.00% Below Avera 0.2000 8.00% -2.00% 14.70% -10.00% 1.00% 6.35% Average 0.4000 8.00% 20.00% 0.00% 7.00% 15.00% 10.00% Above Aver 0.2000 8.00% 35.00% -10.00% 45.00% 29.00% 12.50% Boom 0.1000 8.00% 50.00% -20.00% 30.00% 43.00% 15.00% Expected R 1.0000 8.00% 17.40% 1.74% 13.80% 15.00% 9.57% Variance 0.00% 4.01% 1.79% 3.54% 2.35% 0.11% Std. Deviation 0.00% 20.04% 13.36% 18.82% 15.34% 3.34% Coefficient of Variation 0.00 1.15 7.68 1.36 1.02 0.35 Beta 0.00 1.29 -0.86 0.68 1.00 0.22 a. What are investment returns? What is the return on an investment that costs $1,000 and is sold after 1 ye Dollar Return = Amount Received – Amount Inv $100.00 Rate of Return = $100.00 = 10.00%  $1,000.00  b. (1) Why is the T-bill's return independent of the state of the economy? Do T-bills promise a completely risk The U.S. federal government will redeem the T-bills at par regardless of the state of the economy. Once the T holding period is known and certain. They are free of default risk since the U.S. federal government has the p money. However, they are not completely risk-free: T-bills nominal rates of return reflect the expected inflatio than what is expected the realized real rate of return may be less than expected. Also, investing in a portfolio as the nominal rate of return in future periods is not known, and a future decrease in interest rates could lowe earned on future T-bills relative to the nominal rate on the current period's T-bills. b. (2) Why are Alta Industries' returns expected to move with the economy whereas Repo Men's are expecte As an electronics firm, Alta industries sales, profits, and cash flow are higher when the economy does well an poorly; i.e., Alta is positively correlated with the market like a normal stock. Since Repo Men, Inc. collects pas cash flow are higher when the economy does poorly and more people are behind on their debt payments, and lower when the economy is doing well and more people are employed and able to stay current on their debt p counter-cyclical stock and somewhat negatively correlated with the market. c. Calculate the expected rate of return on each alternative and fill in the blanks in the row for expected return Expected return = (Answers in row 11 of Table on page 1.) d. You should recognize that basing a decision solely on expected returns is appropriate only for risk-neutral
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virtually everyone, is risk-averse, the riskiness of each alternative is an important aspect of the decision. One standard deviation of returns. (1) Calculate this value for each alternative, and fill in the blank in the row for s (2) What type of risk is measured by the standard deviation? (3) Omit the graph. Standard Deviation
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Mini case - Mini Case State of the Alta Repo American...

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