Question

10-59 A firm is choosing a new product. The follow- ing table summarizes six new potential products, Considering expected return and risk, which prod- ucts are good candidates? The firm believes it can earn 4% on a risk-free investment in government securities (labeled as Product F). Product IRR Standard Deviation 10.4% 3.2% 9.8 2.3 6.0 1.6 12.1 3.6 5 12.2 13.8 6.5 F 4.0 - تا دوا ها 8.0 6 0.0

Answer 1

Ans. =

For the Comparison between these Products, we need to firstly find the Return per Unit of Risk. As all of these products have different Standard Deviations.

Risk Free Rate : 4%

Return Per Unit of Risk (Sharpe Ratio):

= (IRR - Risk Free Rate) / Standard Deviation

Product 1:

Return Per Unit of Risk:

= (10.4 - 4) / 3.2
= 2

Product 2:

Return Per Unit of Risk:

= (9.8 - 4) / 2.3
= 2.52

Product 3:

Return Per Unit of Risk:

= (6.0 - 4) / 1.6
= 1.25

Product 4:

Return Per Unit of Risk:

= (12.1 - 4) / 3.6
= 2.25

Product 5:

Return Per Unit of Risk:

= (12.2 - 4) / 8.0
= 1.025

Product 6:

Return Per Unit of Risk:

= (13.8 - 4) / 6.5
= 1.51

So, By Analysing the Risk and Returns of All of these Products, we can say that 'Product 2' has Highest Returns (2.52) and Lowest Risk.

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