Chapter 6, 24 Solutions

Chapter 6, 24 Solutions - MINI CASE Chapter 6 & 24...

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Assume that you recently graduated with a major in finance, and you just landed a job as a financial planner with Barney Smith Inc., a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the funds are to be invested in a new business the client plans to start at the end of one year, you have been instructed to plan for a one-year holding period. Further, your boss has restricted you to the investment alternatives shown in the table below. (Disregard for now the items at the bottom of the data; you will fill in the blanks later.) Returns On Alternative Investments Estimated Rate Of Return State of the T- Alta Repo Am. Market 2-stock economy Prob. Bills Inds Men Foam portfolio portfolio Recession 0.1 8.0% -22.0% 28.0% 10.0%* -13.0% 3.0% Below avg 0.2 8.0 -2.0 14.7 -10.0 1.0 Average 0.4 8.0 20.0 0.0 7.0 15.0 10.0 Above avg 0.2 8.0 35.0 -10.0 45.0 29.0 Boom 0.1 8.0 50.0 -20.0 30.0 43.0 15.0 r-hat ( r ^ ) 8.0% 1.7% 13.8% 15.0% Std dev ( σ ) 0.0 13.4 18.8 15.3 Coef of var (cv) 7.9 1.4 1.0 beta (b) -0.86 0.68 *Note that the estimated returns of American Foam do not always move in the same direction as the overall economy. For example, when the economy is below average, consumers purchase fewer mattresses than they would if the economy were stronger. However, if the economy is in a flat-out recession, a large number of consumers who were planning to purchase a more expensive inner spring mattress may purchase, instead, a MINI CASE
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cheaper foam mattress. Under these circumstances, we would expect American Foam’s stock price to be higher if there is a recession than if the economy was just below average. Barney Smith’s economic forecasting staff has developed probability estimates for the
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This note was uploaded on 02/27/2012 for the course BUS 510 taught by Professor Mehdi during the Spring '11 term at University of La Verne.

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Chapter 6, 24 Solutions - MINI CASE Chapter 6 & 24...

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