Assume that you recently graduated with a major in finance and that

Assume that you recently graduated with a major in finance and that you just landed a job as a financial planner with Barney Smith Inc., a large financial services corporation. Your first assignment is to invest $100,000 for a client. Because the funds are to be invested in a new business that the client plans to start at the end of 1 year, you have been instructed to plan for a one year holding period. Further, your boss has restricted you to the investment alternatives shown in the table below. (Disregard for not the items at the bottom of the data: you will fill in the blanks later.)

Barney Smith’s economic forecasting staff has developed probability estimates for the state of the economy, and its security analysts have developed a sophisticated computer program that was used to estimate the rate of return on each alternative under each state of the economy. Alta Industries is an electronics firm; Repo Men Inc. collects past-due debts; and American Foam manufactures mattresses and various other foam products. Barney Smith also maintains an “index fund” that owns a market-weighted fraction of all publicly traded stocks; you can invest in that fund and thus obtain average stock market results. Given the situation as described, answer the following questions.

 

Table

 Estimated Returns on Alternative Investments

State of the Economy

Probability

T-Bills

Alta Industries

Repo Men

American Foam

Market Portfolio

2-Stock Portfolio

Recession

0.1

8.0%

-22.0%

28.0%

10%

-13%*

3.0%

Below Average

0.2

8.0

-2.0

14.7

-10.0

1.0

Average

0.4

8.0

20.0

0.0

7.0

15.0

10.0

Above Average

0.2

8.0

35.0

-10.0

45.0

29.0

Boom

0.1

8.0

50.0

-20.0

30.0

43.0

15.0

8.0%

1.7%

13.8%

15.0%

 

 

 

0.0%

 

13.4%

18.8%

15.3%

 

CV

 

 

 

7.9

1.4

1.0

 

b

 

 

 

-0.86

0.68

 

 

 

 

 

 

k) The expected rates of return and the beta coefficients of the alternatives, as supplied by Barney Smith’s compute program, are as follows:

 

Ecurity                          Return ()                      Risk (Beta)

Alta Industries              17.4%                          1.29

Market                         15.0                             1.00

American Foam           13.8                             0.68

T-Bills                         8.0                               0.00

 

Repo Man                   1.7                               -0.86

 

 

(1)   Do the expected returns appear to be related to each alternative’s market risk?

(2)   Is it possible to choose among the alternatives on the basis of the information developed thus far?

 

L) (1) Write out the security Market Line (SML) equation, use it to calculate the required rate of return on each alternative and then graph the relationship between the expected and required rates of return?  (2) How do the expected rates of return compare with the required rates of return? (3) Does it make sense that Repo Men has an expected return that is less than the T-Bill rate? (4) What would the market risk and required return of a 50-50 portfolio of Alta industries and Repo Men? Of Alta Industries and American Foam?

 

 

M) (1) Suppose investors raised their inflation expectations by 3 percentage points over current estimates as reflected in the 8% T-Bill rate. What effect would higher inflation have on the SML and on the returns required on high-and low-risk securities? (2) Suppose instead that investors’ risk aversion increased enough to cause the market risk premium to increase by 3 percentage points. (Assume inflation remains constant.) What effect would this have on the SML and on returns of high-and low-risk securities? 

Order a unique copy of this paper
(550 words)

Approximate price: $22

Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

We value our customers and so we ensure that what we do is 100% original..
With us you are guaranteed of quality work done by our qualified experts.Your information and everything that you do with us is kept completely confidential.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

The Product ordered is guaranteed to be original. Orders are checked by the most advanced anti-plagiarism software in the market to assure that the Product is 100% original. The Company has a zero tolerance policy for plagiarism.

Read more

Free-revision policy

The Free Revision policy is a courtesy service that the Company provides to help ensure Customer’s total satisfaction with the completed Order. To receive free revision the Company requires that the Customer provide the request within fourteen (14) days from the first completion date and within a period of thirty (30) days for dissertations.

Read more

Privacy policy

The Company is committed to protect the privacy of the Customer and it will never resell or share any of Customer’s personal information, including credit card data, with any third party. All the online transactions are processed through the secure and reliable online payment systems.

Read more

Fair-cooperation guarantee

By placing an order with us, you agree to the service we provide. We will endear to do all that it takes to deliver a comprehensive paper as per your requirements. We also count on your cooperation to ensure that we deliver on this mandate.

Read more

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency