Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Financial Management Expert

Investor Smith is determining whether to invest in the Pacific Pools Corp. (“PPC”) or Swimming-R-Us, Corp. (“SRU”). Smith believes that putting all of eggs in one basket is a sound strategy. Thus, he intends to only invest in either PPC or SRU. Investor Baker is evaluating the same two companies, PPC and SRU. Although Baker believes that investing in many companies at similar time is a sound strategy, and is thus determining whether either PPC or SRU must be added to her portfolio.

Throughout their investigation, both Smith and Baker have found out that the returns on pool manufacture’s stocks are sensitive to weather. Both have determined that if the weather in the US is sunny in the coming year, the stock of PPC must raise by 50%. If the weather in the US is normal, then the stock of PPC must raise by 10% and if the weather in the US is rainy, then the stock of PPC must decrease by 20%. The National Weather Service has indicated that there is a 30% chance for sunny weather, 50% chance for normal weather and a 20% of rainy weather in the coming year.

In addition factors that Smith and Baker have determined about such stocks are that the standard deviation for PPC is 24.98% and the beta for PPC is 1.5. For SRU, the standard deviation is 5%, the expected return (r) is 9% and the beta is .95. In addition, Smith and Baker have determined that the risk-free rate is 5% and the return on the market is expected to be 11%.

Baker currently has a portfolio of three stocks; 30% of her portfolio is made up of Coke that has an expected return (r) of 10% and a beta of .80; 40% of her portfolio is made up of Intel that has an expected return of (r) of 13%, and a beta of 1.5; and, 30% is made up of General Electric, that has an expected return (r) of 11% and a beta of 1.0.

problem 1: Determine the risk, expected return (r) and required return (rs) of Baker’s portfolio. Do this supposing that she has not yet added either PPC or SRU to the portfolio. Is Baker being sufficiently compensated for the risk that she is taking with her portfolio?

problem 2: Determine the required rate of return (rs) for each of stocks in Baker’s portfolio. Which stock must she substitute with either PPC or SRU?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M9670

Have any Question? 


Related Questions in Financial Management

The spring flower co has earnings of 180 per share the

The Spring Flower Co. has earnings of $1.80 per share. The benchmark PE for the company is 16. What stock price would you consider appropriate? (Do not round intermediate calculations and round your answer to 2 decimal p ...

Your grandmother gives you 350 dollars for your birthday

Your grandmother gives you 350 dollars for your birthday, which you invest in a mutual fund on January 1, 2002. On June 1, 2002, she gives you 670 dollars for your high school graduation, which you immediately deposit in ...

For each of these situations determine the savings amount

For each of these situations, determine the savings amount. Use the time value of money tables in Exhibit 1-A, Exhibit 1-B, Exhibit 1-C. a. What would be the future value of a savings account started with $700, earning 1 ...

E-eyescom just issued some new preferred stock the issue

E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $26 in perpetuity, beginning 15 years from now. If the market requires a return of 4 percent on this investment, how much does a s ...

Shredding pines company wishes to purchase an asset that

Shredding Pines Company wishes to purchase an asset that costs $750,000. The full amount needed to finance the asset can be borrowed at 9 percent interest. The terms of the loan require equal end-of-year payments for the ...

Lohn corporation is expected to pay the following dividends

Lohn Corporation is expected to pay the following dividends over the next four years: $17, $13, $12, and $7.50. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the req ...

Sensor international sells 300000 packages in its first

Sensor international sells 300,000 packages in its first year and 400,000 in its second. If the investor's original investment was $100,000, determine the return on investment in year 1 and year 2 for the firm. Assume a ...

Bond yields and rates of return a 25-year 8 semiannual

Bond Yields and Rates of Return A 25-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,100. The bond sells for $950. (Assume that the bond has just been issued.) .W ...

Your company generated 30 million in revenue for 2014 and

Your company generated $3.0 million in revenue for 2014 and incurred $2.35 million in expenses. a. How much Federal tax due you owe? ________________________________ b. What is your average tax rate? ____________________ ...

Suppose you calculate a return on fixed assets of 20 for

Suppose you calculate a return on fixed assets of 20% for 2008 and 15% for 2009 for a company. Explain how you would use the DuPont system to further investigate this change in the return on fixed asset ? In examining th ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro