Case Study: Assessing Asset X and Y
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Cash Flow 1,000 1,500 1,400 1,700 1,900 1,600 1,700 2,000 2,100 2,200 1.60 1.00
0.07 0.05
Asset X Value Beginning 20,000 22,000 21,000 24,000 22,000 23,000 26,000 25,000 24,000 27,000
Ending 22,000 21,000 24,000 22,000 23,000 26,000 25,000 24,000 27,000 30,000
Beta (X) Beta (Y) Risk Free Rate EMPR
a. Calculate the annual rate of return for each asset in each of the 10 preceding years, and use those v the average annual return for each asset over the 10-year period. Return (X) Return (Y) 15.00% 2.27% 20.95% -1.25% 13.18% 20.00% 2.69% 4.00% 21.25% 19.26% 11.74% 7.50% 8.00% 13.50% 8.57% 13.81% 13.64% 9.13% 13.91% 13.75% 9.60% 11.14%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Average Return
b. Use the returns calculated in part a to find (1) the standard deviation and (2) the coefficient of v the returns for each asset over the 10-year period 2000-2009.
STD(X) STD(Y) CV(X) CV(Y)
8.90% 2.78% 0.76 0.25
c. Use your findings in parts a and b to evaluate and discuss the return and risk associated with Which asset appears to be preferable? Explain. Asset Y is less variable than the asset X. Both assets have similar expected returns, but their volatilities d significantly. Consequently, coefficient of variation favors asset Y as investors take less risk per percentag
Asset Y is less variable than the asset X. Both assets have similar expected returns, but their volatilities d significantly. Consequently, coefficient of variation favors asset Y as investors take less risk per percentag
Expected return Standard deviation Coefficient of variation
Asset X 11.74% 8.90% 0.76
Asset Y 11.14% 2.78% 0.25
d. Use the CAPM to find the required return for each asset. Compare this value with the average a returns calculated in part a. Beta (X) Beta (Y) Risk Free Rate EMPR R(X) R(Y)
1.60 1.00
0.07 0.05 Required Return Expected Return 11.74% 15.00% 11.14% 12.00% Invest No No
Cash Flow 1,000 1,500 1,400 1,700 1,900 1,600 1,700 2,000 2,100 2,200 1.60 1.00
0.07 0.05
Asset X Value Beginning 20,000 22,000 21,000 24,000 22,000 23,000 26,000 25,000 24,000 27,000
Ending 22,000 21,000 24,000 22,000 23,000 26,000 25,000 24,000 27,000 30,000
Beta (X) Beta (Y) Risk Free Rate EMPR
a. Calculate the annual rate of return for each asset in each of the 10 preceding years, and use those v the average annual return for each asset over the 10-year period. Return (X) Return (Y) 15.00% 2.27% 20.95% -1.25% 13.18% 20.00% 2.69% 4.00% 21.25% 19.26% 11.74% 7.50% 8.00% 13.50% 8.57% 13.81% 13.64% 9.13% 13.91% 13.75% 9.60% 11.14%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Average Return
b. Use the returns calculated in part a to find (1) the standard deviation and (2) the coefficient of v the returns for each asset over the 10-year period 2000-2009.
STD(X) STD(Y) CV(X) CV(Y)
8.90% 2.78% 0.76 0.25
c. Use your findings in parts a and b to evaluate and discuss the return and risk associated with Which asset appears to be preferable? Explain. Asset Y is less variable than the asset X. Both assets have similar expected returns, but their volatilities d significantly. Consequently, coefficient of variation favors asset Y as investors take less risk per percentag
Asset Y is less variable than the asset X. Both assets have similar expected returns, but their volatilities d significantly. Consequently, coefficient of variation favors asset Y as investors take less risk per percentag
Expected return Standard deviation Coefficient of variation
Asset X 11.74% 8.90% 0.76
Asset Y 11.14% 2.78% 0.25
d. Use the CAPM to find the required return for each asset. Compare this value with the average a returns calculated in part a. Beta (X) Beta (Y) Risk Free Rate EMPR R(X) R(Y)
1.60 1.00
0.07 0.05 Required Return Expected Return 11.74% 15.00% 11.14% 12.00% Invest No No