You have recently graduated with a major in finance, and you just landed a job in...
You have recently graduated with a major in finance, and you just landed a job in the trust department of a large regional bank. Your first assignment is to invest KES 10 million from an estate for which the bank is a trustee. Because the estate is expected to be distributed to the heirs in about one year, you have been instructed to plan for a one-year holding period. Further, your boss has restricted you to the following investment alternatives, shown with their probabilities and associated outcomes.
|
Returns on alternatives investments |
||||||
|
Estimated rate of return |
||||||
|
State of economy |
Prob. |
T-Bills |
High-Tech Corporation |
Excel collections Ltd |
Ribbon manufacturing |
Market portfolio |
|
Recession |
0.1 |
8% |
-22% |
28% |
10% |
-13% |
|
Below average |
0.2 |
8% |
-2% |
14.7% |
-10% |
1% |
|
Average |
0.4 |
8% |
20% |
15% |
7% |
15% |
|
Above average |
0.2 |
8% |
35% |
-10% |
45% |
29% |
|
Boom |
0.1 |
8% |
50% |
-20% |
30% |
43% |
High-Tech Corporation is an electronics firm; Excel Collections Ltd. Collects past-due debts; and Ribbon Manufacturing Ltd. manufactures tyres and other rubber and plastics products. The bank also maintains an “Index fund” which owns a market –weighted fraction of all publicly traded stocks; you can invest in that fund and thus obtain average stock market results.
Calculate the expected rate of return on each alternative.
Homework Answers
Solution :
Expected Rate of Return of T - Bills = 8.00 %
Expected Rate of Return of High - Tech Corporation = 17.40 %
Expected Rate of Return of Excel Collections Ltd = 7.74 %
Expected Rate of Return of Ribbon Manufacturing = 13.80 %
Expected Rate of Return of Market Portfolio = 15.00 %
Please find the attached screenshots of the excel sheet containing the detailed calculation for the solution.
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