Why should you avoid the use of sarcasm , cliches, and idioms in business letters?

Your uncle holds just one stock, East Coast Bank (ECB). You agree that this stock is relatively safe, but you want to demonstrat

g100num [7]

Complete question:

Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB). Both banks have had less variability than most other stocks over the past 5 years.

Year ECB WCB

2004 40.00% 40.00%

2005 -10.00% 15.00%

2006 35.00% -5.00%

2007 -5.00% -10.00%

2008 15.00% 35.00%

a. What is the expected return and risk of each stock?

b. Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? In other words, what is the difference between portfolio's standard deviation and weighted average of components' standard deviations? (Hint: check the example on page 11-12 on my note).

Solution:

The estimated return of the stock is the average profit.

So the average of ECB is (40-10+35-5+15)/5

= $\frac{75 percent}{5}$

= 15% expected return

WCB expected return = 40+15-5-10+35

= $\frac{75 percent}{5}$

= 15%

They've had the same planned return.

This is generally defined in the Greek letter Mu, (U) A weighted average may also be used to calculate portfolio volatility.

Standard deviation of ECB is $\sqrt{{ sum [(x-U)^2]/5}}$

so for ECB:

$(40-15)^2$ = $25^2$ =6.25%

$(-10-15)^2$ = $-35^2$ = 0.1225

$(35-15)^2$ = $20^2$ = 0.04

$(-5-15)^2$ = $-20^2$ = 0.04

$(15-15)^2$ =0

now 0.0625+0.1225+0.04+0.04+0=0.265

stdev= $\sqrt{(0.265/5)}$ = 0.23

So WCB is the same except in a different order to make things quick I'm only going to add the median again WCB=0.23

Then the 60/40 portfolio will be the "weighted average" of the returns.

portfolio returns

2004: (60%*40%)+(40%*40%) = 40%

2005: (60%*-10%)+(40%*15%) = 0%

2006: (60%*35%)+(40%*-5%) = 19%

2007: (60%*-5%)+(40%*-10%) = -7%

2008:(60%*15%)+(40%*35%) = 23%

we have an average return of (40+19-7+23)/5 = 75/5 =15%

The estimated return of all combined stocks is a better way to do so.

we knew they both had expected returns of 15% so we can say

(60%*15%)+(40%*15%)=15% so the portfolio has an expected return of 15%

Now we do the standard deviation for the whole portfolio and get

$(40-15)^2$ = $25^2$ =6.25%

$(0-15)^2$ = - $25^2$ =6.25%

$(19-15)^2$ = $4^2$ = 0.16%

$(-7-15)^2$ = $-22^2$ = -4.84%

$(23-15)^2$ = $8^2$ = 0.64%

now add them up and get 9.78%

$\sqrt{(9.78%/5)}$ = 13.98%

Therefore, the normal portfolio variance is 13.98 per cent and the predicted portfolio return is 15 per cent.

Every stock has a standard deviation of 23 per cent and an average return of 15 per cent, meaning that the fund has the same estimated return but with less standard deviation. This ensures that the same gain is less costly. It's stronger than any of these products.

5 0

2 years ago

A major lottery advertises that it pays the winner $10 million. However, this prize money is paid at the rate of $ 500,000 each

My name is Ann [436]

Answer:

We have to discount these payments to find the present value

500,000

500,000/1.1

500,000/1.1^2

500,000/1.1^3

We keep on doing this until we reach 500,000/1.1^19

After that we add all the payments and get the value. A less time consuming way of doing it is using a financial calculator

Pv=?

N=19

FV=0

PMT=500,000

=4,182,460.05 we add 500,000 to this because the first payment was not discounted=4,682,460.05= Present Value.

Explanation:

8 0

2 years ago

Your grandfather wants to establish a scholarship in his father’s name at a local university and has stipulated that you will ad

Paul [167]

Answer:

the answer for the first question is $166667.

the answer for the second question is $210526

the answer for the third question is An inverse.

Explanation:

given information that i will invest in a $10000 scholarship that will pay forever.

the interest rate charged is 6.00% per annum therefore this is a perpetuity present value problem where there is streams of income forever therefore we use the formula :

Pv of perpetuity= Cf/r

where Cr is the cash flows payed by the single investment forever in this case $10000 then r is the interest rate of the investment amount which is 6% in this case.

Pv of Perpetuity= $10000/6%

=$166667 therefore i must invest this amount to get the scholarship running with streams of $10000 forever.

in the second problem if now the interest rate is changed from 6% to 4.75% then the amount to be invested would be :

Pv of perpetuity = $10000/4.75%

=$210526 therefore this is the amount to be invested for a forever $10000 stream of incomes for a scholarship.

the relationship is indirect cause as the interest rate decreases the present value of the perpetuity that must be invested increases.

3 0

2 years ago

CDF Appliances has assembly plants in Atlanta and Fort Worth where it produces a variety of kitchen appliances, including a 12-c

zloy xaker [14]

Answer:

Cappuccino machines should be produced in Atlanta and coffee makers in Fort Worth. The Fort Worth facility would need to operate 100 hours per week and the Atlanta facility would need to operate 140 hours per week.

Total costs associated to operating the facilities = ($2,400 x 100) + ($600 x 140) = $324,000

Explanation:

Since there is not constraint regarding the total number of labor hours that each plant can operate, then we must choose the plant that operates at the lower cost. The only restriction is total time = 7 days x 24 hours = 168 hours per week:

production costs Atlanta:

coffee maker = $600 / 160 = $3.75 per unit

cappuccino machine = $600 / 200 = $3 per unit

production costs Fort Worth:

coffee maker = $2,400 / 800 = $3 per unit

cappuccino machine = $2,400 / 200 = $6 per unit

Cappuccino machines should be produced in Atlanta and coffee makers in Fort Worth. The Fort Worth facility would need to operate 100 hours per week and the Atlanta facility would need to operate 140 hours per week.

6 0

2 years ago

The S&P 500 index delivered a return of 10%, 15%, 15%, and −25% over four successive years. What is the arithmetic ave

natali 33 [55]

Answer:arithmetic average annual return per year= 3.75%

Explanation:

Year 1 = 10%

Year 2= 15%

Year 3 = 15%

Year 4 = -25%

total return = 15%

Arithmetic average annual return per year =(Return of year1 + return of year 2 + return of year 3+ return of year 4 )/4 = 15% /4 = 3.75%

5 0

2 years ago