Financial Management

Authors Avatar

FINANCIAL MANAGEMENT

PEACHTREE SECURITIES CASE

BY

FRANCISCO MURRIETA

4-4-05


  1. The return on a 1-year T-Bond is risk-free since it does not vary according to the state of the economy. The T-Bond return is independent of the state of the economy because the estimated return is 8% at all times. The only possible factor affecting a T-Bond may be inflation.

  1.  (See KEY OUTPUT ) If we were only to consider the expected return, then the S&P 500 appears to be the best investments since it has the greatest expected return.

  1. The standard deviation provides a measurement of the total risk by examining the tightness of the probability distribution associated with the different possible outcomes whereas the coefficient of variation measures risk per unit. The coefficient of variation is a better measure when investments have different expected returns and different levels of total risk.  When risk is considered, the best alternative depends on how much risk the investor is willing to take. The S&P 500 may be the stock with the greatest expected return therefore is also expected to have the greatest standard deviation while the other potential investments have lower expected return and consequently a lower standard deviation.

  1. A portfolio between TECO – Gold Hill’s would yield a expected return of 11.2%, with a standard deviation of 2.9%, and coefficient of variation of 0.26.  Compared to TECO, this portfolio yields a lower return because Gold Hill’s expected return is low and that brings the average between the two down. The opposite occurs to Gold Hill’s expected return because TECO’s expected return brings the portfolio return up
Join now!

 The correlation between the two investments, offers somewhat of a reduction if risk.

  1. In case the portfolio was 75% Gold Hill the expected return would decrease because the 8.8% return component would have more weight. If the portfolio contained 75% of TECO the expected return would increase since TECO’s expected return would have more weight in this case. Nevertheless, such reduction in diversification would make risk increase. The complete table “Risk and returns of portfolios” provides the different changes.

  1. The portfolio between TECO – S&P 500 has an expected return of 14.3% and a standard deviation ...

This is a preview of the whole essay