CASE STUDY

Financial Reporting



Financial Reporting

Return on Investment

= (Profit-Cost of Investment) / Cost of Investment= ($ 1,100-$ 1,000)/$ 1,000

= 10%

Question B

Returns on T-Bills are fixed by the government when it announces the auction of the treasury securities. Regardless of the fact, as to how the economy is performing, the return of the investors would remain same. T-Bills are risk free in a sense that they are free from default risk.

Since Alta industry is an electronic firm, the profits of the company depends upon the sales of the products. A highly flourishing economy will increase the demand of the electronic products, both from the consumer and corporate end. This will raise the sales of the company, resulting in a high profit margin. Likewise, if the economic growth is declining, or the county is facing economic crisis, it will affect the company as it sensitive to the economic activities. Therefore, the industry is expected to move with the economy.

On the other hand, Repo's men are involved in the business of collecting past due debts. In case of a fallen economy, creditors are unable to repay their loans. As a result, the company bears loss in terms of non-performing loans. Therefore, Repo's men are expected to move counter to the economy.

State of the Economy

Probability

T-Bills

Alta Industries

Repo Men

American Foam

Market Portfolio

2-Stock Portfolio

Recession

0.1

8.0%

-22.0%

28.0%

10.0%

13.0%

3.0%

Below Average

0.2

8.0%

-2.0%

14.7%

-10.0%

1.0%

Average

0.4

8.0%

20.0%

0.0%

7.0%

15.0%

10.0%

Above Average

0.2

8.0%

35.0%

-10.0%

45.0%

29.0%

Boom

0.1

8.0%

50.0%

-20.0%

30.0%

43.0%

15.0%

Expected Return

 

8.0%

17.4%

1.7%

13.8%

15.0%

9.6%

s

 

0.0%

28.7%

13.4%

18.8%

15.3%

6.0%

CV

 

 

1.65

7.9

1.4

1.0

0.63

b

 

 

0.47

-0.86

0.68

1.00

2.36

Required rate of Return

 

 

11.3%

2.0%

12.8%

15.0%

24.5%

Effect of Inflation

 

 

Required rate of Return

 

11%

12.9%

9.4%

12.1%

16.1%

25.6%

Standard Deviation is an indicator of total risk. It measures the degree of systematic and unsystematic risk.

Coefficient of Variance does not produce the same rankings as the standard deviation as the former is just the measure of stand-alone risk, whereas, the latter is the indicator of the total risk experienced by the companies (Rendleman, 1975).

In case of a 2-stock portfolio, the risk is comparatively less than the stocks in isolation. The reason is that is ...