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FIN 419 Week 1 Activity Set Latest 2016 Version
P 5-5 Risk and Probability
Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and and each requires an initial investment of $4,000. Management has constructed the accompanying table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results.
a. Determine the range for the rate of return for each of the two cameras.
b. Determine the expected value of return for each camera.
c. Purchase of which camera is riskier? Why?
You have been given the expected return data shown in the first table on three assets-F, G, and H- over the period 2013-2016. Expected return Asset F 2013 16%, 2014 17% 2015 18% 2016 19%- Asset G 2013 17% 2014 16% 2015 15% 2016 14% - Asset H 2013 14% 2014 15% 2015 16% 2016 17%
Using these assets, you have isolated the three investment alternatives shown in the following table.
Alternative investments 1- 100% of asset F Alternative 2 50% of asset F and 50% of asset G Alternative 3 50% of asset F and 50% of asset H
a. Calculate the expected return over the 4-year period for each of the three alternatives
b. Calculate the standard deviation of returns over the 4-year period for each of the three alternatives
c. Use your findings in parts a and b to calculate the coefficient of variation for each of the three alternatives
d. On the basis of your findings, which of the three investment alternatives do you recommend? why?
Show all your work in an excel format
Capital Asset Pricing Model (CAPM)
For the assets shown in the following table, use the capital asset pricing model to find the required return.