Question

In: Finance

Mr. James is a Finance Director with a risk-averse type in making financial decisions. The list...

Mr. James is a Finance Director with a risk-averse type in making financial decisions. The list below is a list of 4 investment alternatives that Mr. Andi needs to decide.

Asset

Initial Investment

Pessimistic Scheme

Moderate Scheme

Optimistic Scheme

A

100.000

16%

24%

28%

B

   100.000

10%

24%

26%

C

   100.000

6%

24%

30%

D

   100.000

22%

24%

28%

Which asset will Mr James take? Explain why?

Solutions

Expert Solution

Computation of Mean return

Scheme

Asset A

Asset B

Asset C

Asset D

Pessimistic

16.00%

10.00%

6.00%

22.00%

Moderate

24.00%

24.00%

24.00%

24.00%

Optimistic

28.00%

26.00%

30.00%

28.00%

Total returns

68.00%

60.00%

60.00%

74.00%

Mean ---> Total returns / no. of schemes

22.67%

20.00%

20.00%

24.67%

Standard Deviation of Asset A

Scheme

Asset A

Mean return

Deviation from return

Square of deviation from return

Pessimistic

16.00%

22.67%

-6.67%

0.44%

Moderate

24.00%

22.67%

1.33%

0.02%

Optimistic

28.00%

22.67%

5.33%

0.28%

Step1 : Sum of square of deviation from return

0.75%

Step2 : Step 1/ No. of schemes

0.25%

Step 3: Standard Deviation ---> Square root of Step 2

4.99%

Standard Deviation of Asset B

Scheme

Asset B

Mean return

Deviation from return

Square of deviation from return

Pessimistic

10.00%

20.00%

-10.00%

1.00%

Moderate

24.00%

20.00%

4.00%

0.16%

Optimistic

26.00%

20.00%

6.00%

0.36%

Step1 : Sum of square of deviation from return

1.52%

Step2 : Step 1/ No. of schemes

0.51%

Step 3: Standard Deviation ---> Square root of Step 2

7.12%

Standard Deviation of Asset C

Scheme

Asset C

Mean return

Deviation from return

Square of deviation from return

Pessimistic

6%

20.00%

-14.00%

1.96%

Moderate

24%

20.00%

4.00%

0.16%

Optimistic

30%

20.00%

10.00%

1.00%

Step1 : Sum of square of deviation from return

3.12%

Step2 : Step 1/ No. of schemes

1.04%

Step 3: Standard Deviation ---> Square root of Step 2

10.20%

Standard Deviation of Asset D

Scheme

Asset D

Mean return

Deviation from return

Square of deviation from return

Pessimistic

22%

24.67%

-2.67%

0.07%

Moderate

24%

24.67%

-0.67%

0.00%

Optimistic

28%

24.67%

3.33%

0.11%

Step1 : Sum of square of deviation from return

0.19%

Step2 : Step 1/ No. of schemes

0.06%

Step 3: Standard Deviation ---> Square root of Step 2

2.49%

Asset

Mean return

Standard deviation

A

22.67%

4.99%

B

20.00%

7.12%

C

20.00%

10.20%

D

24.67%

2.49%

Mr. James takes Asset D as it has the highest mean return among all the assets. Also Asset D scores well on the risk side as it has the lowest standard deviation among the assets.

Hope this helps you answer the question. Please provide your feedback or rating on the answer.

Thanks

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Risk is not a significant factor when making financial decisions because all business decisions involve predictions...
Risk is not a significant factor when making financial decisions because all business decisions involve predictions about the future, which is unknown. T/F
How will understanding finance and making correct financial decisions contribute to your general quality of life?...
How will understanding finance and making correct financial decisions contribute to your general quality of life? What are parallels between how a successful business manages its money and how you manage yours?
One of the key assumptions in finance is that people are risk averse. What do we...
One of the key assumptions in finance is that people are risk averse. What do we mean by risk aversion? Does this seem to be a valid assumption? Explain. How does globalization relate to the concept of maximizing firm value?
Mr. James, president of Daniel-James Financial Services, believes that there is a relationship between the number...
Mr. James, president of Daniel-James Financial Services, believes that there is a relationship between the number of client contacts       and the dollar amount of sales. To document this assertion, he gathered the following information from a sample of clients for the last month. Let X represent the number of times that the client was contacted and Y represent the value of sales ($1000) for each client sampled.                         Number of`                             Sales                         Contacts (X)                            ($1000) (Y)                         14                                            24                        ...
Mr. James, president of Daniel-James Financial Services, believes that there is a relationship between the number...
Mr. James, president of Daniel-James Financial Services, believes that there is a relationship between the number of client contacts and the dollar amount of sales. To document this assertion, he gathered the following information from a sample of clients for the last month. Let X represent the number of times that the client was contacted and Y represent the value of sales ($1000) for each client sampled.                         Number of`                             Sales                         Contacts (X)                            ($1000) 10 26 8 21 12...
Mr. James, president of Daniel-James Financial Services, believes that there is a relationship between the number...
Mr. James, president of Daniel-James Financial Services, believes that there is a relationship between the number of client contacts and the dollar amount of sales. To document this assertion, he gathered the following information from a sample of clients for the last month. Let X represent the number of times that the client was contacted and Y represent the value of sales ($1000) for each client sampled.                         Number of`                             Sales                         Contacts (X)                            ($1000) 10 26 8 21 12...
Do you think there are limitations to only considering risk and return when making financial decisions?...
Do you think there are limitations to only considering risk and return when making financial decisions? Explain. (*Edit: this is for intro to finance, so just general financial decisions)
The finance director of St. James hospital estimates that on average 33% of its revenue equals...
The finance director of St. James hospital estimates that on average 33% of its revenue equals its variable cost. Fixed costs are budgeted at $24 million per year. If their budget predicts a volume of business of 30,000 patient-days next year, what is the average daily revenue per patient (rounded to two digits) for St. James to breakeven? A. $800.00 B. $1,194.03 C. $65,753.42 D. $2.424.24 E. $536.00
What types of investors are risk-takers, risk-neutral, and risk averse? If you were assisting with financial...
What types of investors are risk-takers, risk-neutral, and risk averse? If you were assisting with financial planning, what kinds of questions would you ask an investor in order to help determine his/her appetite for risk? What types of financial assets would be more heavily weighted in a generic portfolio for each investor type and why?"
Mr. James McWhinney, president of Daniel-James Financial Services, believes there is a relationship between the number...
Mr. James McWhinney, president of Daniel-James Financial Services, believes there is a relationship between the number of client contacts and the dollar amount of sales. To document this assertion, Mr. McWhinney gathered the following sample information. The x column indicates the number of client contacts last month and the y column shows the value of sales ($ thousands) last month for each client sampled. Number of Contacts,X Sales ($ thousands),y Number of Contacts,x Sales ($ thousands),y 14 24 23 30...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT