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
Here is the pro-forma income statement for Semen Indonesia, an overseas venture that Cemex is planning to invest in.  In this exercise, you will need to evaluate the inve

Question 1 If the economy booms, RTF, Inc. stock is expected to return 10%. If the economy goes into a recessionary period, then RTF is expected to only return 4%. The probability

Part A Paris Co. Ltd has Equity Share Capital of Rs 500,000. To meet the expenditure of an expansion programme, the company wishes to raise Rs 300,000 and is having the given

For a large set of SKUs and in two successive selling seasons, we have compared the accuracy of three quantitative forecasting methods based on advance (preview) demand information

Risk means balancing between profitability and long-term growth. If a company looks at short-term goals, it may go in for profit maximization but it will find it difficult to susta

Question 1: Capital Expenditure Decisions and Investment Criteria (30 MARKS) In recent years Morten Ltd, a company that manufactures and markets a range of p

Westbrook Inc. is financed with debt that costs it 5% (pre-tax)or $12.5m annually and expects to generate an EBITof $50m per year perpetually. The company is at its target debt/eq


I purchased an answers document from your site 5 hours ago and it isn''t still delivered. It said that it would take up to 2 hours but it isn''t still delivered. When will it be de

An original United States silver dollar from the late 1800s consists of about 24 grains of silver.  Suppose that at current prices, the silver content of this coin is worth $2.25.