Question
In: Finance
Friedman Manufacturing, Inc. has prepared the following information regarding two investments under consideration. Which investment is...
- Friedman Manufacturing, Inc. has prepared the following information regarding two investments under consideration. Which investment is better, based on risk (as measured by the standard deviation) and return?
|
Common Stock A |
Common Stock B |
||
|
Probability |
Return |
Probability |
Return |
|
.20 |
12% |
.10 |
4% |
|
.50 |
18% |
.30 |
6% |
|
.30 |
27% |
.40 |
10% |
|
.20 |
15% |
||
Solutions
Expert Solution
| Answer | ||||||||||
| Stock A | Stock B | |||||||||
| A | B | C=A*B | D=C-Average | (D)^2 | A | B | C=A*B | D=C-Average | (D)^2 | |
| Prob | Return | X =Prob * Return | X-Mean(Ave) | Whole square of X-Mean | Prob | Return | X =Prob * Return | X-Mean(Ave) | Whole square of X-Mean | |
| 0.2 | 12% | 0.024 | -0.041 | 0.001681 | 0.1 | 4% | 0.004 | -0.019 | 0.000361 | |
| 0.5 | 18% | 0.09 | 0.025 | 0.000625 | 0.3 | 6% | 0.018 | -0.005 | 0.000025 | |
| 0.3 | 27% | 0.081 | 0.016 | 0.000256 | 0.4 | 10% | 0.04 | 0.017 | 0.000289 | |
| 0.2 | 15% | 0.03 | 0.007 | 0.000049 | ||||||
| Total | 0.002562 | 0.000724 | ||||||||
| Average of Stock A | 0.065 | Average of Stock A | 0.023 | |||||||
| 6.50% | 2.30% | |||||||||
| 0.001281 | ||||||||||
| N= Number of probabilities | 3 | N= Number of probabilities | 4 | 0.000241333 | ||||||
| N-1 | 2 | N-1 | 3 | |||||||
| Where: | ||||||||||
| SD= | Square Root of | sum( X-Mean)^2 | X = Return observed in one period | |||||||
| n-1 | Mean = Average return of the stock | |||||||||
| n = number of years | ||||||||||
| SD (A)= | Square Root of | 0.002562 | SD (B)= | Square Root of | 0.000724 | |||||
| 2 | 3 | |||||||||
| SD (A)= | Square Root of | 0.001281 | SD (B)= | Square Root of | 0.0002413 | |||||
| SD (A)= | 0.0358 | 3.58% | SD (B)= | 0.0155349 | 1.58% | |||||
| Analysis | ||||||||||
| Stock A | Stock B | |||||||||
| Mean( Average) | 6.50% | 2.30% | ||||||||
| SD | 3.58% | 1.58% | ||||||||
| Variation | 2.92% | 0.72% | ||||||||
| The variation between Mean(Average) Vs SD of Stock B is less | ||||||||||
| Hence investment in Stock B is Better |
 jeff jeffy answered 1 year agoRelated SolutionsFriedman Manufacturing, Inc. has prepared the following information regarding two investments under consideration.
Friedman Manufacturing, Inc. has prepared the following information regarding two investments under consideration. Which investment is better, based on risk (as measured by the standard deviation) and return?
Common Stock A
Common Stock B
Probability
Return
Probability
Return
.20
12%
.10
4%
.50
18%
.30
6%
.30
27%
.40
10%
.20
15%
“ More can be said about risk, especially as to its nature, when we own more than one asset in our investment portfolio.” Define risk...
Eclipse, Inc., has a new project under consideration that will require an investment of $6.9 million...Eclipse, Inc., has a new project under consideration that will
require an investment of $6.9 million today. If the project is
successful, the cash flows will be $2.6 million for 12 years. If
the project is unsuccessful, the cash flows will be $285,000 per
year. Additionally, the company could sell the project’s fixed
assets in one year and realize an aftertax salvage value of $4.7
million. The required return is 16 percent. What is the minimum
probability of success that...
TamariskCompany has several investments in the securities of other companies. The following information regarding these investments...TamariskCompany has several investments in the securities of
other companies. The following information regarding these
investments is available at December 31, 2017.
1.
Tamarisk holds bonds issued by Dorsel Corp. The bonds have an
amortized cost of $322,000 and their fair value at December 31,
2017, is $395,000. Tamarisk intends to hold the bonds until they
mature on December 31, 2025.
2.
Tamarisk has invested idle cash in the equity securities of
several publicly traded companies. Tamarisk intends to sell...
University Hospital has four capital projects under consideration with the following investments and projected cash flows....University Hospital has four capital projects under
consideration with the following investments and projected cash
flows. What is their optimal capital budget allocation if their
corporate cost of capital is 12%?
Year
0
1
2
3
4
5
Project
A
(600,000)
50,000
90,000
150,000
200,000
250,000
B
(400,000)
80,000
100,000
100,000
100,000
100,000
C
(700,000)
100,000
220,000
250,000
250,000
250,000
D
...
Optimization of Capital Budgets University Hospital has four capital projects under consideration with the following investments...Optimization of Capital Budgets
University Hospital has four capital projects under
consideration with the following investments and projected cash
flows. What is their optimal capital budget allocation if their
corporate cost of capital is 12%?
Year
0
1
2
3
4
5
Project
A
(600,000)
50,000
90,000
150,000
200,000
250,000
B
(400,000)
80,000
100,000
100,000
100,000
100,000
C
(700,000)
100,000
220,000
250,000
250,000...
Watson Company has several investments in the securities of other companies. The following information regarding these...Watson Company has several investments in the securities of
other companies. The following information regarding these
investments is available at December 31, 2019.
1. Watson holds bonds issued by Fowler Corp. The bonds have an
amortized cost of $600,000, and their fair value at December 31,
2019, is $700,000. Watson intends to hold the bonds until they
mature on December 31, 2022.
2. Watson has invested idle cash in the equity securities of
several publicly traded companies. Watson intends to...
An investment under consideration has a payback of eight years and a cost of $868,000. Assume...
An investment under consideration has a payback of eight years
and a cost of $868,000. Assume the cash flows are conventional.
If the required return is 10 percent, what is the worst-case
NPV?
Lombard, Inc. has two investment centers and has developed the following information: Department A Department B...Lombard, Inc. has two investment centers and has developed the
following information: Department A Department B Departmental
controllable margin $120,000 ? Average operating assets ? $400,000
Sales 800,000 250,000 ROI 10% 12% Answer the following questions
about Department A and Department B.
1. What was the amount of Department A's average operating
assets? Average Operating Assets $ ?
2. What was the amount of Department B's controllable margin?
Controllable Margin $ ?
3. If Department B is able to reduce...
The following portfolios are being considered for investment. During the period under consideration, RFR = 0.07....
The following portfolios are being considered for investment.
During the period under consideration, RFR = 0.07.
Portfolio Return Beta σi
P 0.17 1.00 0.06
Q 0.19 1.10 0.07
R 0.11 0.70 0.04
S 0.23 1.30 0.10
Market 0.14 1.00 0.05
Compute the Sharpe measure for each portfolio and the market
portfolio. Round your answers to three decimal places.
Portfolio Sharpe measure
P __________
Q __________
R __________
S __________
Market
Compute the Treynor measure for each portfolio and the market...
Which of the following statements is (are) true regarding a company that has implemented flexible manufacturing...Which of the following statements is (are) true regarding a
company that has implemented flexible manufacturing systems and
activity-based costing?
I. The company has erred, as these two practices used in
conjunction with one another will severely limit the firm's ability
to analyze costs over the relevant range.
II. Costs formerly viewed as fixed under traditional-costing
systems may now be considered variable with respect to changes in
cost drivers such as number of setups, number of material moves,
and so...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
ADVERTISEMENT
|