Compute the expected return, Corporate Finance

You have ten million dollars to allocate across two projects, code named 'Wombat' and 'Marmot.' Both projects are somewhat scalable, in that you could potentially invest as much (up to your budget) or as little (bounded below by zero) as you wish. Both projects are risky, in the sense that you can estimate an internal rate of return for each, but depending on how things go; the returns could be higher or lower.

You have estimated that Project Wombat has an expected IRR of20%, but that the standard deviation of that IRR is 30%. Project Marmot has an expected IRR of 10%,with a standard deviation of 12%.

a. Compute the expected return of taking:

(i) 1/4 Wombat and 3/4 Marmot.

(ii)  1/2 Wombat and 1/2 Marmot.

(iii) 3/4Wombat and 1/4 Marmot.

b. If you go half and half, what is the standard deviation of returns of the combination, assuming that the returns on the projects are uncorrelated?

c. If you can choose any pair of weights (bounded by 0% and 100%), exactly what weights maximize the expected return of the combination?

Express the weights as percentages of the total budget.

d.         If you can choose any pair of weights (bounded by 0% and 100%), exactly what weights minimize the standard deviation of the combination, and how low can the standard deviation go (to two decimal places, e. g., 3.45%)?

Express the weights as percentages of the total budget.

e. Assume that you want the optimal expected return to risk trade off (i.e., the maximum Sharpe ratio). What weights do you put in each project if the risk free rate is 2%?

Express the weights as percentages of the total budget.

Posted Date: 2/20/2013 12:37:03 AM | Location : United States







Related Discussions:- Compute the expected return, Assignment Help, Ask Question on Compute the expected return, Get Answer, Expert's Help, Compute the expected return Discussions

Write discussion on Compute the expected return
Your posts are moderated
Related Questions
Table gives the average MAPE, again for all SKUs with positive preview demand together (overall) and also per preview demand class. We remark that despite of the large differences

Question 1: ‘An internal rating system may incorporate supplementary customer information which is usually out of the reach of an external credit assessment institution.' Discu

X is owned entirely by two individuals, A and B (who are unrelated unless otherwise stated).  A owns 60 shares of X common stock (purchased in one transaction for $600).  B owns 40

The cost of capital for a firm can differ from the cost of capital for each of its businesses. When a firm has multiple businesses, it is important to use the cost of capital appro

I have been given 3 different types of projects. They state the IRR and how much the project will add. The question goes on to give a WACC with break points. The question wants

Suppose you are given the expected yearly returns and standard deviations and correlations shown in the tables below: The market portfolio has an expected return of 18% and

Problem: (a) The Automated Clearing House (ACH) is an electronic payment network used by individuals, businesses, financial institutions and government organisations. (i) Ou

CivilENG, LTD has a target capital structure of 35% debt and the remainder common equity. CivilENG’s cost of debt on the first $3 million borrowed is 7.5%, but that cost of debt in

Ask question #Minimum 100 words acceptedPlease describe what you see as the financial reporting failures in the last four years time period#

Chang and Fyffe (1971) assume that a ?rm has a ''long-run sales history of individual seasonal-style-goods SKUs or groups of such SKUs''. They propose to estimate demand by using r