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
Question
Chapter 8, Problem 8.3WUE
Summary Introduction
To discuss:
Comparing risk of two investments.
Introduction:
Risk: The risk can be defined as the uncertainty attached to an event such as investment where there is some amount of risk associated to it as there can be either gain or loss.
The standard deviation measures the volatility of the stock. It measures in absolute terms the dispersion of asset risk around its mean.
The coefficient of variation is an asset risk indicator that measures the relative dispersion. It describes the volatility of asset returns relative to its mean or expected return.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
The expected annual returns are 15% for investment 1 and 12% for investment 2. The standard deviation of the first investment’s return is 10%; the second investment’s return has a standard deviation of 5%.
Which investment is less risky based solely on standard deviation?
investment 1 or 2
Which investment is less risky based on coefficient of variation?
investment 1 or 2
1. If you perform a NPV analysis on a perspective investment using a "d" = 15% and:
a. the NPV Is < 0, what can you tell me about the investment's IRR (time adjusted rate of return)?
b. the NPV is > 0, what can you tell me about the investment's IRR (time adjusted rate of return)?
c. the NPV is= 0, what can you tell me about the investment's IRR (time adjusted rate of return)?
2. We presume in Investment analysis that the payback method of evaluation is a better measure of.................than it is a measure of...................... We also think less of the payback method because it sometimes ignores the............., ..................of an investment since the................. the oftentimes occurs after the payback period has lapsed.
3. Please explain why we oftentimes equate EBITDA (earnings before subtracting] interest, taxes, depreciation & amortization) with NOI (net operating income) in examining business' profitability. Why don't…
Which of these two companies is best for investment?
Trend
Probability
Rate of Retrun (Company A)
Rate of Retrun (Company B)
Bullish Trend
0.3
50%
25%
Normal Trend
0.4
20%
15%
Beaerish Trend
0.3
-10%
15%
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
Similar questions
- For investment A, the probability of the return being 20.0% is 0.5, 10.0% is 0.4, and -10.0% is 0.1 Compute the standard deviation for the investment with the given information. (Round your answer to one decimal place.) a. 85.00% b. 15.00% c. 34.00% d. 17.00% e. 9.00%arrow_forwardThe standard deviation of return on investment a is 0.10, while the standard deviation of return on investment b is 0.04. If the correlation coefficient between the returns on A and B is_____________. A. -0.0447 B. -0.0020 C. 0.0020 D. 0.0447arrow_forwardThe expected annual returns are 15% for investment 1 and 12% for investment 2. The standard deviation of the first investment’s return is 10%; the second investment’s return has a standard deviation of 5%. A.) Which investment is less risky based solely on standard deviation? (Investment 1 or Investment 2)B.) Which investment is less risky based on coefficient of variation? (Investment 1 or Investment 2)C.) Which is a better measure given that the expected returns of the two investments are not the same? (Coefficient of Variation or Standard Deviation)arrow_forward
- You are considering investing in a project with the following possible outcomes: Probability of Investment States Occurrence Returns State 1: Economic boom 18% 20% State 2: Economic growth 42% 16% State 3: Economic decline 30% 3% State 4: Depression 10% -25% Calculate the expected rate of return and standard deviation of returns for this investment, respectively. O 7.35%, 12.99% O2.18%, 1.69% O 8.72%, 12.99% O3.50%, 1.69%arrow_forwardYour expectations from a one year investment in Wang Computers are as follows: Probability Rate of Return .15 -.10 .15 -.20 .35 .00 .25 .15 .10 .15 expected rate of return? standard deviation? coeefecient of variation on investment?arrow_forwardA firm has a choice between 2 investment proposals. Using the information in the table below, which investment will the firm choose? A firm has a choice between 2 investment proposals. Using the information in the table below, which investment will the firm choose? Investment A Investment B Mean return 15% 15% Standard deviation of returns .9% .8% Correlation coefficient -.8 -.7arrow_forward
- Compute the expected rate of return on investment i, given the following information: Rf=9%; CAPM=14%; beta i=1.0. Recalculate the required rate of return assuming beta i is 1.5arrow_forwardCompute the expected rate of return on investment i given the followinginformation: Rf = 8%; E(RM) = 14%; βi = 1.0.b. Recalculate the required rate of return assuming βi is 1.8.arrow_forwardCalculate the reward-to-variability (Sharpe) ratio if you have 75% in Security C and 25% in Security D with a risk-free rate of 3%. Year A, % B, % C, % D, % E, % 1 10.67 -3.76 12.98 25.51 8.96 0.34 2 3 4 12.54 21.67 45.23 18.97 29.67 15.94 -8.82 19.84 16.52 -11.57-12.07 4.66 5.56 13.37 14.28 21.42 25.68 -4.45 27.34 4.98 -15.53 26.22 31.08 15.14 21.94 11.35 1.28 17.23 -12.87 -2.89 5 6 0.78 0.93 01.06 S&P, % 0.87arrow_forward
- Calculate the expected return for an investment with the following probability distribution. Return (%) Probability (%) -10 20 5 20 10 20 17 30 26 10arrow_forwardThe following investments and probabilities are presented: INVESTMENT 1 Years yield probability 1 11 0.25 2 13 0.25 3 19 0.10 4 16 0.20 5 15 0.20 INVESTMENT 2 Years yield PROBABILITY 1 18 0.15 2 16 0.15 3 11 0.40 4 10 0.15 5 11 0.15 1 Calculate the expected return on each investment 2 Calculate the standard deviation of both investments and indicate which investment is riskier and why? 3 Calculate the coefficient of variation of both investments and indicate which investment is riskier and why? In this case it is…arrow_forwardConsider the following investments: Investment Expected return Standard deviationA 5% 10%B 7% 11%C 6% 12%D 6% 10% Which would you prefer between the following pairs:a) A and Db) B and Cc) C and Darrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you