+1-415-315-9853

info@mywordsolution.com

## Accounting

 Accounting Basics Cost Accounting Financial Accounting Managerial Accounting Auditing Taxation

Assume that you recently graduated and landed a job as a financial planner with Cicero Services, an investment advisory company. Your first client recently inherited some assets and has asked you to evaluate them. The client presently owns a bond portfolio with \$1 million invested in zero coupon Treasury bonds that mature in 10 years.40 The client also has \$2 million invested in the stock of Blandy, Inc., a company that produces meat-and- potatoes frozen dinners. Blandy's slogan is "Solid food for shaky times." Unfortunately, Congress and the President are engaged in an acrimonious dispute over the budget and the debt ceiling. The outcome of the dispute, which will not be resolved until the end of the year, will have a big impact on interest rates one year from now. Your first task is to determine the risk of the client's bond portfolio. After consulting with the economists at your firm, you have specified five possible scenarios for the resolution of the dispute at the end of the year. For each scenario, you have estimated the probability of the scenario occurring and the impact on interest rates and bond prices if the scenario occurs. Given this information, you have find outd the rate of return on 10-year zero coupon for each scenario. The probabilities and returns are shown below:

Scenario Probability of
Scenario Return on a 10-Year
Zero Coupon Treasury Bond
During the Next Year
Worst Case 0.10 -14%
Poor Case 0.20 -4%
Most Likely 0.40 6%
Good Case 0.20 16%
Best Case 0.10 26%
1.00

You have also gathered historical returns for the past 10 years for Blandy, Gourmange
Corporation (a producer of gourmet specialty foods), and the stock market.

Historical Stock Returns
Year Market Blandy Gourmange
1 30% 26% 47%
2 7 15 -54
3 18 -14 15
4 -22 -15 7
5 -14 2 -28
6 10 -18 40
7 26 42 17
8 -10 30 -23
9 -3 -32 -4
10 38 28 75
Average return: 8.0% ? 9.2%
Standard deviation: 20.1% ? 38.6%
Correlation with the market: 1.00 ? 0.678
Beta: 1.00 ? 1.30

The risk-free rate is 4% and the market risk premium is 5%.

a. What are investment returns? What is the return on an investment that costs \$1,000 and is sold after 1 year for \$1,060?

b. Graph the probability distribution for the bond returns based on the 5 scenarios. What might the graph of the probability distribution look like if there were an infinite number of scenarios (i.e., if it were a continuous distribution and not a
discrete distribution)?
c. Use the scenario data to find out the expected rate of return for the 10-year zero coupon Treasury bonds during the next year.
d. What is stand-alone risk? Use the scenario data to find out the standard deviation of the bond's return for the next year.
e. Your client has decided that the risk of the bond portfolio is acceptable and wishes to leave it as it is. Now your client has asked you to use historical returns to estimate the standard deviation of Blandy's stock returns. (Note: Many analysts use 4 to 5 years of monthly returns to estimate risk and many use 52 weeks of weekly returns; some even use a year or less of daily returns. For the sake of simplicity, use Blandy's 10 annual returns.)
f. Your client is shocked at how much risk Blandy stock has and would like to reduce the level of risk. You suggest that the client sell 25% of the Blandy stock and create a portfolio with 75% Blandy stock and 25% in the high-risk Gourmange stock. How do you suppose the client will react to replacing some of the Blandy stock with high- risk stock? Show the client what the proposed portfolio return would have been in each of year of the sample. Then find out the s average return and standard deviation using the portfolio's annual returns. How does the risk of this two-stock portfolio compare with the risk of the individual stocks if they were held in isolation?
g. describe correlation to your client. find out the estimated correlation between Blandy and Gourmange. Does this describe why the portfolio standard deviation was less than Blandy's standard deviation?
h. Suppose an investor starts with a portfolio consisting of one randomly selected stock. As more and more randomly selected stocks are added to the portfolio, what happens to the portfolio's risk?

Accounting Basics, Accounting

• Category:- Accounting Basics
• Reference No.:- M940811
• Price:- \$45

Priced at Now at \$45, Verified Solution

Have any Question?

## Related Questions in Accounting Basics

### Accounting assignmentyour response should be 2-3 pages

Accounting Assignment YOUR RESPONSE SHOULD BE 2-3 PAGES COMPRISING BOTH RESEARCH CASES. Professional Research 1 Your client took accounting a number of years ago and was unaware of comprehensive income reporting. He is n ...

### A tomato farmer with a very large farm of approximately

A tomato farmer with a very large farm of approximately 2200 acres had heard about a new type of rather expensive fertilizer which would supposedly significantly increase his production. The frugal farmer wanted to test ...

### Managerial accounting and financial accountingcompare and

Managerial Accounting and Financial Accounting Compare and Contrast Managerial Accounting and Financial Accounting. Be sure to discuss how managerial accounting is useful for providing information for at least one of the ...

### Governmental accounting1 which of the following statements

GOVERNMENTAL ACCOUNTING 1. Which of the following statements is true about U.S. taxation of foreign subsidiaries? A)The U.S. does not tax income generated on subsidiaries incorporated in foreign countries. B)U.S. multina ...

### Accounting questionin germany and china separate

Accounting Question: In Germany and China separate institutions established by law carry out the roles of public accounting and auditing. What is the impact of this professional practice on the usefulness of internationa ...

### Accounting questionwhat are the advantages to the

Accounting Question: What are the advantages to the shareholders in a target entity that is acquired via taxable stock acquisition vs. a taxable acquisition of net assets? What are the advantages to the acquiring entity? ...

### Task -you have recently started as the financial accountant

Task - You have recently started as the Financial Accountant in a new organisation, 'Fruito'. Fruito is a local fruit shop which has both a retail shop selling to the public and distributes produce to other local busines ...

### Last year cmc recorded a deferred tax asset related to

Last year, CMC recorded a deferred tax asset related to product warranties and a deferred tax asset related to accelerated depreciation. A 75% valuation allowance was also established. However, with an upcoming internati ...

### Accounting theory and contemporary issues individual case

Accounting Theory and Contemporary Issues Individual case study Assignment- Assessment Description - Learning Outcome:  Research and argue a position in regard to a contemporary issue in the accounting profession. Evalua ...

### Assignmentair france-klm af a franco-dutch company prepares

Assignment Air France-KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF's financial statements and disclosure notes for the year ended Decemb ...

• 13,132 Experts

## 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.

### 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