Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 8, Problem 8.2WUE
Summary Introduction
To discuss:
Expected return
Introduction:
Return: In financial context, return is seen as percentage that represents the profit in an investment.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Explain how a financial market operates?
Which of the investment constraints is expected to have the most impact on your decision process?
You plan to buy common stock and hold it for one year. You expect to receive both ₱150 and ₱260 from the sale of the stock at the end of the year. How much will you pay for the stock, if you want to
a. Have a return of 8%
b. A return of 20%
c. A return of 15%
The investment funds for your company includes the following:
Stock
$ Amount Invested
Beta for Each Stock
A
$ 600,000
.8
B
$ 1,800,000
1.4
C
$ 2,400,000
1.7
D
$ 700,000
-.6
E
$ 3,000,000
1.1
You need to calculate the required rate of return for the investment.
The market’s required return for Year 2020 is 12% and the risk free rate is 3%
Show your work on the following:
Calculate the average beta for the portfolio.
Calculate the required rate of return for the entire portfolio.
The CFO of your company is anticipating that the stock market will be decreasing in the near future. Please give a recommendation on which stock the company should sell and which stock the company should buy. The CFO also wants you to explain your answer.
How can you work this out in Excel?
Suppose that we have an investment with an annual return of 10% and an annual
standard deviation of 25%.
Over a one-year period, what range of returns can we expect with approximately
95% confidence?
1.-15.36% to 55.36%
2.5% to 45%
3.-23.45% to 56.78%
4. -40% to 60%
Chapter 8 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 8.1 - What is risk in the context of financial decision...Ch. 8.1 - Prob. 8.2RQCh. 8.1 - Compare the following risk preferences: (a) risk...Ch. 8.2 - Explain how the range is used in scenario...Ch. 8.2 - Prob. 8.5RQCh. 8.2 - Prob. 8.6RQCh. 8.2 - What does the coefficient of variation reveal...Ch. 8.3 - What is an efficient portfolio? How can the return...Ch. 8.3 - Prob. 8.9RQCh. 8.3 - How does international diversification enhance...
Ch. 8.4 - Prob. 8.11RQCh. 8.4 - Prob. 8.12RQCh. 8.4 - Prob. 8.13RQCh. 8.4 - What impact would the following changes have on...Ch. 8 - Prob. 1ORCh. 8 - Prob. 8.1STPCh. 8 - Prob. 8.2STPCh. 8 - Prob. 8.1WUECh. 8 - Prob. 8.2WUECh. 8 - Prob. 8.3WUECh. 8 - Prob. 8.4WUECh. 8 - Prob. 8.5WUECh. 8 - Prob. 8.6WUECh. 8 - Prob. 8.1PCh. 8 - Prob. 8.2PCh. 8 - Prob. 8.3PCh. 8 - Prob. 8.4PCh. 8 - Prob. 8.5PCh. 8 - Learning Goal 2 P8-6 Bar charts and risk Swans...Ch. 8 - Prob. 8.7PCh. 8 - Prob. 8.8PCh. 8 - Prob. 8.9PCh. 8 - Prob. 8.10PCh. 8 - Prob. 8.11PCh. 8 - Prob. 8.12PCh. 8 - Prob. 8.13PCh. 8 - Prob. 8.14PCh. 8 - Learning Goal 4 P8- 15 Correlation, risk, and...Ch. 8 - Prob. 8.16PCh. 8 - Learning Goal 5 P8- 17 Total, nondiversifiable,...Ch. 8 - Prob. 8.18PCh. 8 - Prob. 8.19PCh. 8 - Prob. 8.20PCh. 8 - Prob. 8.21PCh. 8 - Prob. 8.22PCh. 8 - Prob. 8.23PCh. 8 - Prob. 8.24PCh. 8 - Prob. 8.25PCh. 8 - Prob. 8.26PCh. 8 - Prob. 8.27PCh. 8 - Learning Goal 6 P8- 28 Security market line (SML)...Ch. 8 - Prob. 8.29PCh. 8 - Prob. 8.30PCh. 8 - Prob. 8.31PCh. 8 - Spreadsheet Exercise Jane is considering investing...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- lome Four analysts cover the stock of Fluorine Chemical. One forecasts a 5% return for the coming year. The second expects the return to be -5%. The third predicts a return of 9%. The fourth expects a 1% return in the coming year. You are relatively confident that the return will be positive but not large, so you arbitrarily assign probabilities of being correct of 34%, 6%, 16%, and 44%, respectively, to the analysts' forecasts. Given these probabilities, what is Fluorine Chemical's expected return for the coming year? nents Fluorine Chemical's expected return for the coming year is %. (Round to two decimal places.) Plan on eText media Librai ncial Calculat pter Resource Enter your answer in the answer box and then click Check Answer. amic Study dules Check Answer Clear All All showing mmunication Tools > This course (Introduction to Finance (EIN-101-DOnz1 Distance Spring 2021) is hased on 7urter/Smartr: Drincinles of Managerial Finance Brief Re P Type here to search insert 144 fsarrow_forwardSuppose that you are working as a financial analyst in an investment bank. Your client is seeking your advice to invest in either Stock A or Stock B given the market conditions in the coming year. Stock A is expected to yield a return of 35% if the market experiences a boom and a return of 5% if the market experiences a bust. Stock B is expected to yield a return of 65% if the market experiences a boom and a return of 15% if the market experiences a bust. According to your estimates, there is a 60% probability that the market will experience a boom and a 40% probability that the market will experience a bust. Calculate the expected return for each stock. Which stock would you advise your client to invest in if her/her objective is to maximize returns regardless of the level of risk?arrow_forwardThe following table..shows the one-year return distribution of Startup, Inc. Calculate: a. The expected return. b. The standard deviation of the return. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) 40% Probability Return - 80% 20% -65% 20% - 40% 10% -20% 10% 1,000%arrow_forward
- K Melissa Cutt is thinking about buying some shares of EZLawn Equipment, at $46.30 per share. She expects the price of the stock to rise to $47.65 over the next 3 years. During that time she also expects to receive annual dividends of $6.79 per share. a. What is the intrinsic worth of this stock, given a required rate of return of 12%? b. What is its expected return? BCCCID a. The intrinsic worth of this stock is $ 50.22. (Round to the nearest cent.) b. The expected return is %. (Round to one decimal place.)arrow_forwardSuppose you invest 40% of your fund in stock A and the other 60% in stock B. If stock A and B are expected to have the following returns next year, then what are the expected returns for Stock A, Stock B and your portfolio? ProbabilityStock A Stock B State of Economy Recession Boom .3 .7 13.9%; 4.8%; 10.26% 10.2%; 4.8%; 10.26% 13.9%; 4.8%; 8.44% 10.2%; 4.4%; 8.44% -12% 2% 25% 6% Telegramarrow_forwardQuestion 6. Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be $5.00 per share. The company plows back 50% of its earnings and if the Chief Financial Officer (CFO) estimates that the company's return on equity (ROE) is 16%. Assuming the plowback ratio and the ROE are expected to remain constant forever: Suppose that you are confident that 10% is the required rate of return on the stock. What does the market price of $50.00 per share imply about the market’s estimate of the company’s expected return on equity? (please give a number) *Make sure to input all percentage answers as numeric values without symbols, and use four decimal places of precision. For example, if the answer is 6%, then enter 0.0600.arrow_forward
- As a junior investment manager, your boss instructs you to help a client to invest $100,000for the next year. Particularly, you are asked to form an investment portfolio for the clientby investing in risk-free assets like 90-day bank bill and two stocks: A and B. Stock A hasa beta value of 0.8, an expected return of 7% and a standard deviation of 10%; and stockB has a beta value of 1.2, an expected return of 12% and a standard deviation of 15%.The correlation coefficient between the returns for the two stocks is 0. The risk-free rate is2%.(a) What is the expected return of the risky portfolio with the two stocks that has theleast amount of risk?(b) Suppose that the optimal risky portfolio with the two stocks has a weight of 53% inA and 47% in B, and has the expected return of 9.4% and standard deviation of8.8%. If this client is willing to take a risk measured by standard deviation of 5% forhis overall investment portfolio, how much would you recommend to the client toinvest in the…arrow_forwardLisa is a graduate student from Holmes Institute who is actively involved in investment in the securities market. She had established one investment portfolio 5 years ago. Supposing that the forecast on the economic situation and returns of the portfolio will be as follows in the next year, calculate the expected return, variance and standard deviation of the portfolio. State of economy Probability Rate of returns Mild Recession 0.30 - 5% Growth 0.40 12% Strong Growth 0.30 25%arrow_forwardBased on five years of monthly data, you derive the following information forthe companies listed: Company SDi rm Padma 11.10% 0.82 Meghna 12.60% 0.63 Jamuna 6.60% 0.45 Karnafully 9.70% 0.70 SD on Market 7.60% 1.00 Assuming a risk-free rate of 9% and expected return for the market portfolio is 16 % compute the expected (required) return for all the stocks.arrow_forward
- As a junior investment manager, your boss instructs you to help a client to invest $100,000 for the next year. Particularly, you are asked to form an investment portfolio for the client by investing in risk-free assets like 90-day bank bill and two stocks: A and B. Stock A has a beta value of 0.8, an expected return of 7% and a standard deviation of 10%; and stock B has a beta value of 1.2, an expected return of 12% and a standard deviation of 15%. The correlation coefficient between the returns for the two stocks is 0. The risk-free rate is 2%. (a) What is the expected return of the risky portfolio with the two stocks that has the least amount of risk? (b) Suppose that the optimal risky portfolio with the two stocks has a weight of 53% in A and 47% in B, and has the expected return of 9.4% and standard deviation of 8.8%. If this client is willing to take a risk measured by standard deviation of 5% for his overall investment portfolio, how much would you recommend to the client to…arrow_forward14. John Lewis of Hungerford plc may have returns next year as follows: Return probability 10% 30% 20% 20% -10% 30% -20% 20% What is the standard deviation of returns for John Lewis? A. 24.65% B. 15.86% C. 14.83% D. 22.25%arrow_forwardA. Ali is a financial analyst who observes that the spot rates of the upcoming 4 years will be as follows rl = 4.25%, r2 = 4.5%, r3 = 4.75%, and r4 = 5%. 1. Find fl, f2, f3, and f4. 2. Find 1f4 3. Find 1f3 4. Find 2f4arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
