Using the same economic data, you have been asked to recommend the divestment of one of...
Using the same economic data, you have been asked to recommend the divestment of one of the SBUs and purchase of Company D with expected returns of Boom 18%, Normal 10%, Decline 2%. The % of portfolio for the new investment would be the same as the one sold. Which company do you suggest selling? What will be the portfolio return now?
|
Scenario |
Probability |
Return A |
Return B |
Return C |
|
Boom |
0.2 |
0.2 |
0.3 |
0.45 |
|
Normal |
0.6 |
0.12 |
0.13 |
0.12 |
|
Decline |
0.2 |
0 |
-0.1 |
-0.40 |
|
% of portfolio |
0.4 |
0.35 |
0.25 |
|
Homework Answers
Expected return=Sum(probability*return)
A:
=0.2*0.2+0.6*0.12+0.2*0=0.112
B:
=0.2*0.3+0.6*0.13+0.2*(-0.1)=0.118
C:
=0.2*0.45+0.6*0.12+0.2*(-0.4)=0.082
D:
=0.2*0.18+0.6*0.1+0.2*0.02=0.1
Sell C and buy D
Portfolio return=0.4*0.112+0.35*0.118+0.25*0.1=11.11%
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