Answer:
Risk and Return
1. Joe is an average investor. His financial advisor gave him options of investing in stock A, with a σ of 12%, and stock B, with a σ of 9%. Both stocks have the same expected return of 16%. Joe can pick only one stock and decides to invest in stock B.
Good Financial Decision?
Yes
No
2. Marcie works for an educational technology firm that recently launched its employee stock option plan (ESOP). Marcie allocated all her investments in the ESOP.
Good Financial Decision?
Yes
No
3. rin wants to invest in a hedge fund that has had a very strong performance track record. The hedge fund has given its investors a return of over 60% for the past five years. Although Erin is tempted to put her money in the fund, she decides to conduct due diligence on the hedge fund’s assets, because she is aware that past performance is no guarantee of future results.
Good Financial Decision?
Yes
No
Explanation:
1. Joe's decision to invest in stock B is a good financial decision. Since both investments have the same returns, the decision on which investment to take shifts to the standard deviation of the returns, which specifies the variability of the returns. Invariably, the investment with less standard deviation should win the vote. Therefore, Joe's decision is a good financial decision because investment in B has a standard deviation of 9% unlike A's 12%.
2. Putting all eggs in one market as Marcie had done by allocating all her investments in the ESOP is not a good financial decision, theoretically. It is always best to spread the risks, though higher-yielding investments (returns) bear higher risks.
3. The decision of Erin to conduct due diligence on the hedge fund's assets, despite its past performance is a good financial decision. Due diligence reveals some behind-the-scene information that are instrumental in making sound business decisions. Who are the present managers of the fund? What systems are in place in the entity to guarantee similar future performance, all things being equal? What market's sentiments and information are available for consideration? These questions, and many others can be answered through a due diligence. Surely, "past performance is no guarantee of future results."
Free market economies allocate resources through demand and supply with minimal government intervention.
private ownership- all factors of production within the economy are owned mainly by private individuals and organizations.
Free enterprise- owners of factors of production and producers of a goods and services a free to produce what they want through the market forces of demand and supply.
Competition- <span>Companies have a competitive drive, thus better quality goods and more variety of products which are at lower prices. (more productively efficient )</span>
Answer: $450 profit
The investor exercised the right to buy the stock for 60 and can sell the stock in the market for 68 for an $8 per-share gain.
The gain of 8 minus the premium of 3.50 gives the investor a profit of 4.50
(4.50 Ă— 100 = $450).
Internal growth rate is calculated by dividing retained earnings by total assets.
Retained earnings is calculated by subtracting dividends from net income
So: Retained earnings would be 12,493 - (12,493 X .4)
Then to find internal growth rate take your retained earning from above and divide by total assets (the total on the balance sheet : 106,900).
